An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Pages
▼
Pages
▼
Monday, March 4, 2013
Government spending does not "crowd out" private sector investment. Here...
Here’s another idea for Mike to attack: Keynsian “borrow and spend” stimulus. Assuming this policy actually has a net stimulatory effect, the effect comes ENTIRELY from the “spend” part of “borrow and spend”. In contrast, the “borrow” part has the OPPOSITE effect: an anti-stimulatory effect. So “borrow and spend” is a bit like chucking dirt over your car before cleaning it. I.e. if stimulus is needed, the government / central bank machine (gcbm) might as well just create new money and spend it into the economy (and/or cut taxes).
Put another way, what’s the point of gcbm borrowing something it can produce in infinite quantities at any time and at no cost? It’s as crazy as me “borrowing” fresh air from my next door neighbour. It’s as crazy as a dairy farmer buying milk in the supermarket when there’s a thousand gallon tank of milk outside the farmer’s back door.
Mike - - another great video. I've always thought that another way to counter this argument that government borrowing is taking funds away from the privare sector that it otherwise would have spent or invested is the following: purchasing a treasury security is a VOLUNTARY transaction, so, by definition, if the purchaser had wanted to spend those funds on consumer goods or services or invest those funds in machinery, plants or equipment, he wouldn't have purchased the Treasury! By definition, this is money that the purchaser of the treasury was SAVING and the money was not going to be spent or invested in the real economy, so what could possibly have been crowded out? I suppose some might say, well, if the treasury had not been offered for sale than this saver would have invested in some other financial asset, like a corporate stock or bond. But investments in corporate stocks or bonds in the seconadry market do nothing to help the real economy!
It seems to me that when the government deficit spends, all the parties involved are happy. For example, if the government wants to buy a fighter jet from Lockheed Martin and “pays for it” by issuing a treasury bond, the government is happy because it gets the fighter jet it wanted, Lockheed Martin is happy because it makes a sale and earns revenue and the investor in the Treasury is happy because he wanted to save his money in a safe, risk-free investment (otherwise he would have done something else with his money). So everyone is happy. Where’s the problem? Am I missing something here?
Here’s another idea for Mike to attack: Keynsian “borrow and spend” stimulus. Assuming this policy actually has a net stimulatory effect, the effect comes ENTIRELY from the “spend” part of “borrow and spend”. In contrast, the “borrow” part has the OPPOSITE effect: an anti-stimulatory effect. So “borrow and spend” is a bit like chucking dirt over your car before cleaning it. I.e. if stimulus is needed, the government / central bank machine (gcbm) might as well just create new money and spend it into the economy (and/or cut taxes).
ReplyDeletePut another way, what’s the point of gcbm borrowing something it can produce in infinite quantities at any time and at no cost? It’s as crazy as me “borrowing” fresh air from my next door neighbour. It’s as crazy as a dairy farmer buying milk in the supermarket when there’s a thousand gallon tank of milk outside the farmer’s back door.
Mike - - another great video. I've always thought that another way to counter this argument that government borrowing is taking funds away from the privare sector that it otherwise would have spent or invested is the following: purchasing a treasury security is a VOLUNTARY transaction, so, by definition, if the purchaser had wanted to spend those funds on consumer goods or services or invest those funds in machinery, plants or equipment, he wouldn't have purchased the Treasury! By definition, this is money that the purchaser of the treasury was SAVING and the money was not going to be spent or invested in the real economy, so what could possibly have been crowded out? I suppose some might say, well, if the treasury had not been offered for sale than this saver would have invested in some other financial asset, like a corporate stock or bond. But investments in corporate stocks or bonds in the seconadry market do nothing to help the real economy!
ReplyDeleteIt seems to me that when the government deficit spends, all the parties involved are happy. For example, if the government wants to buy a fighter jet from Lockheed Martin and “pays for it” by issuing a treasury bond, the government is happy because it gets the fighter jet it wanted, Lockheed Martin is happy because it makes a sale and earns revenue and the investor in the Treasury is happy because he wanted to save his money in a safe, risk-free investment (otherwise he would have done something else with his money). So everyone is happy. Where’s the problem? Am I missing something here?