This blog was drawn, in part, from an edited version of a submission that I made with Warren Mosler in 2001 to the Commonwealth Debt Inquiry, which sought to justify why the government should continue to issue debt when it was in fact running increasing surpluses.
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At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.…
Great post.
Bill Mitchell – billy blog
There is no need to issue public debt
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Milton Friedman advocated the same "no debt" policy in 1948. See para starting "Under the proposal..." here:
ReplyDeletehttp://0055d26.netsolhost.com/friedman/pdfs/aea/AEA-AER.06.01.1948.pdf
However there’s an argument for retaining the debt, but keeping it at a very low rate of interest. It’s that if the private sector has a large stock of base money it might go into a fit of irrational exuberance, and try to spend too much all at once. Debt on the hand is more difficult to spend.
"Debt on the hand is more difficult to spend."
ReplyDeleteWith a market maker of last resort in the market. You jest surely.
And that's before you get onto the obvious point that this stuff is grade A collateral for loans.
Spending increases taxation and stops the deficit in its tracks. So the auto-stabilisers handle the issue even before you get onto a discretionary response.
It always amuses the hell out of me that classical monetary theory assumes infinite liquidity in the FX market and restricted liquidity in the bond market, when the reality is exactly the opposite.
Pretty much the same result as quits in the labour market.
"classical monetary theory assumes infinite liquidity in the FX market and restricted liquidity in the bond market"
ReplyDeleteExactly, Neil. Should stop any thinking person in their tracks. Goes to show how few stop & think.
I like the idea of workers being able to buy a pension direct from the Government. If that was on offer expect to hear a whooshing noise as everyone moves their pension funds from crap assed bankers products and simultaneously pay off the national "debt" (ironic smile). I would like to be a fly on the wall in a bank boardroom the day they announce that one.... I can dream eh!
ReplyDeleteIf residents don't have to "buy" any other public contracting or Public Policy from their elected government ..... why on Earth would they need to "buy" pensions for the elderly?
ReplyDeleteK-12 edu? mandatory, & free
DoD/NSA/CIA/Corp-Welfare? mandatory, & "free"
Pensions for elderly? (must be bought, and pre-paid, no less; uh ... why?)
All entitlements are free. Some entitlements are just more free than others!
Werks fur mi! (and for all the unemployed :( )
Roger,
ReplyDeleteNo need to sound exasperated, I was thinking of a country like the UK, where the basic pension is universal but people with excess savings buy private pensions (which are mostly parked in government bonds with an annuity component). If these private pensions were lodged in a government account the private financial sector doesn't get to collect massive rents for basically doing nothing.
Maybe we just think about similar things from different angles.
Ok, Andrew,
ReplyDeleteNow I understand your view. As you say, I was thinking of the USA context. Had no idea you were expressing the lime flavor. :)
ps: just had my first "bitter" in 10 years, and danged if I didn't like it (cold, anyway)