Read it at Multiplier Effect
In What Sense Does Government Debt “Burden”?
by Michael Stephens
Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites. Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance. Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate.
I read through these posts and I am totally confused. Yes, I am a neophyte when it comes to economics and these posts are very circular in nature.
ReplyDeleteI would suggest if you have an opinion state it. I am real tired of trying to figure out who is right and who is wrong. There must be at least four differing opinions in these links.
Those who chose not to spend their money today (and therefore cause a systemic problem in a system that allows excess savings to occur) are taking a risk.
ReplyDeleteThat risk is that they will be able to obtain the same or better real goods and services tomorrow as they can today for the money
The whole of neo-classical economics is about making sure that risk is eliminated because they work for those with financial assets.
Even though their attitudes run down the production system, the mechanisms of neo-classical economics ensure that the financial asset rich class get the same real output tomorrow as today.
Which of course means that the non-financial asset rich class are the ones that are made to suffer from the hysteresis impact of their policies. (What is produced tomorrow depends upon what happens today).
And yet with something like functional finance the hysteresis effect is stopped and those with financial assets are still likely to get their real output when they want it.
Only in the teeth of a massive boom is spending from those excess savings likely to be suppressed.
And even then it only needs to be a delayed receipt rather than a confiscation.
So the only substantive objection can be the loss of relative power in the society from the functional finance system.
I would just point out that this whole discussion takes govt securities issuance for granted.
ReplyDeleteWe dont really have to issue govt debt securities in the first place.
We could set policy rates to zero by law and keep them there. Which would negate the need for govt securities for MP purposes... then the non-govt sector would just retain USD balances as the NFAs vice UST securities in return for govt provision. (Then what would they complain about)
So the whole discussion is trying to nail down absolute logic on a topic that is optional in the first place.... I dont know how useful this is.
Resp,
Neil Wilson: "The whole of neo-classical economics is about making sure that risk is eliminated because they work for those with financial assets."
ReplyDeleteBollox. I work for Carleton university, not some hedge fund.
Yours is the sort of argument made by someone too lazy to think about the question.
If you only want to read lefties, OK, here is Robert Waldmann on the same subject:
http://www.angrybearblog.com/2012/01/educating-dean-baketr.html
Matt Franko is roughly right. We could use monetary policy to increase demand, not fiscal policy. (But keeping interest rates permanently at 0% would almost certainly make demand increase far too much for far too long, and would require an extremely tight fiscal policy in the future for a very long time to offset that very loose monetary policy. If you overdo a cure, it can be worse than the disease.)
ReplyDeleteMatt & Nick, currency is a government security, and whether the government issues positive-interest securities or not changes nothing on this level of generality. Money, currency, bonds are debt. Debt is a burden. Therefore in any monetary economy, there will be sectors being burdened by others. The ones with money are a burden on the rest, or the state. But if we take a national economy as a whole, then there is no debt, no burden but that outside that economy, because we have just combined everyone's balance sheets. So foreign debt is not a "second order" obligation, but a "first order" one, something which Lerner certainly did emphasize. If you are able to disagree with Lerner, #1, you simply do not understand what Lerner (a reasonable representation of him) is saying.
ReplyDeleteMitchell-Innes, a century ago, as usual was very clear and emphatic about the sense of outstanding money or bond debt being a debt, a burden which could become onerous (and inflationary, perhaps making taxation necessary to disinflate). "It is the issue of money which is the burden ..." Of course Lerner understood this sense perfectly too, this sort of thinking is integral to FF/MMT, not alien to it. E.g. when he notes that, taking the viewpoint of a state applying functional finance to its economy, it is somewhat better to have a lower debt/GDP than not, because "interventions" likely to be necessary may be smaller. But a 3000% debt/GDP would be no biggie. Mislaid my copy, might be slightly mistating him, but this is in his Economics of Employment and probably Economics of Control too.
As one commenter noted Domar is an earlier ref than Samuelson (#4). Lerner's observation that functional finance is sounder than sound finance is earlier still, with antecedents in Keynes, and there are many subsequent papers on the general idea, culminating in Fulwiller, Godley etc.
So the only thing wrong with the real Abba Lerner, unlike a straw man Lerner, was that he stated his trivial ideas in simple prose with irrefutable arguments, instead of disguising them and mystifying them with a pretense of mathematics, as became the fashion, and he perfectly well understood and wrote about what was true in the other positions. Fashion-followers, perhaps including modern macroeconomists then managed to mystify themselves very successfully. But they probably never learnt that in mathematics above all, the trivial ideas are the most important and the hardest to find. That's what mathematics is about. Learning trivialities which make everything clear.
Add to third para above: "And of course this line of thought (#4), to which Lerner contributed, is completely consistent with Lerner #1."
ReplyDeleteGood points, Calgacus.
ReplyDeleteThat's what mathematics is about. Learning trivialities which make everything clear.
Philosophy, too. It is simpler in math due to the high degree of formalism. The informalism of ordinary language has a richness that results in ambiguity, conflation, and other mistakes that lead to confusion and are very difficult to unravel.
When ordinary language terms are used outside their ordinary use, whose context determines their meaning, as often happens in philosophy and sciences that are not highly formalized, then if these terms are not technically defined and the definitions adhered to pseudo-problems abound.
This is why rigorous expression requires technical terminology and is expressed formally in so far as possible. However, it is not always possible to formalize an argument, and even if an argument is successfully formalized, it has to be explained to lay people in a way they can understand if they are to act on it, e.g., policy. Another difficulty here is that different parties may have their own axes to grind, i.e., politically, and therefore present the ordinary language version rhetorically in a way that bolsters their desired outcome.
A difficulty with formalism also is that its expression is so simple that expressing complexity requires huge models and if scientific, those models have to be interpreted accurately wrt to empirical phenomena if they are to be explanatory and predictive. Before the development of digital information processing, this was not humanly possible in many cases. Even highly ergodic physical systems like the atmosphere are not possible for us to predict completely accurately yet, as we are reminded by weather reporting that fails to warn of impending disasters in time to prepare.
This presents a further problem for the social sciences that involve complexity due to uncertainty and reflexivity., where ergodicity does not apply as it does in the hard sciences.
Many problems arise in economics, for example, owing to the use of ordinary language terms technically, and then not adhering rigorously to the technical meaning. JKH has observed that this can be avoided by using standard double-entry accounting procedure and maintaining stock-flow consistency. The accounting record is a near perfect model of the economy in terms of information derived from data recorded as transactions.
As a philosopher, when I see issues, problems and controversies arising in a supposed formalized discipline like economics, for example, the kerfuffle over savings and investment, I immediately think that the confusion arises from issues with the terminology and that clearing that up would clarify the problem as being largely a pseudo-problem arising from confused expression. JKH just made a good case for this over at Asymptosis by expressing the issue in terms of accounting.