Wednesday, December 27, 2017

Mike Kimel — The National Debt Disappeared

I commented there.

Angry Bear
The National Debt Disappeared
Mike Kimel


The Arthurian said...

Tom -- Great link!

RE your comments there, I'm pretty sure I understand your point. I don't think you disagree that Keynes said what Kimel says he said. I think you disagree with the statement, preferring Abba Lerner and other views of debt and budget balancing. My view is more like Kimel's: I have not much problem with the idea that budgets should be balanced over the business cycle. But I don't want to argue that point.

For purposes of documentation, I want to quote Keynes from the New York Times of 10 June 1934:
I see the problem of recovery, accordingly, in the following light: How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime?

Tom Hickey said...

Thanks, Art.

My point was that Keynes said to target full employment and the budget will take care of its self.

Mike Kimel came back with the objection that Keynes favored balancing the budget over the cycle.

I agreed that Keynes held that view but that Lerner countered with functional finance, with which some Post Keynesians, some institutionalists, and all MMT economists subsequently agreed. The fiscal balance will tend toward balance owing to automatic stabilization and increasing revenue, with stabilizers increasing government spending and revenue decreasing in contractions and vice versa in expansions. So, the budget takes care of itself, according to the following rationale.

Keynes held that theory assuming general equilibrium and maximization was wrong in assuming that full employment in the long run was sufficient as a policy formulation to deal with unemployment. Keynes observed that a monetary production economy can get stuck away from full employment owing to demand leakage to saving. (In the long run we are all dead).

Keynes asserted the principle of effective demand in opposition to Say's law supply creates it own demand. He held that policy could be used to address demand leakage and high liquidity preference.

The mistake of neoclassical economics, which Keynes called classical economics, was starting with a barter economy, following Smith, and assuming that money is neutral. Keynes observed that money is not neutral in a modern monetary production economy. Keynes was a chartalist and understood the importance of state money, following Knapp.

Neoclassical economics also assumed perfect markets with symmetrical knowledge. Keynes countered with uncertainty. Liquidity preference, hence the ratio of saving desire to spending desire, is affected by uncertainty. Uncertainty increases saving desire and confidence increases spending desire. This affects both private credit creation and money velocity. This affects the performance of monetary production economies. Money is not neutral, and finance plays a key role.

MMT economists would agree that the budget "tends toward balance" over the cycle owing to automatic stabilization and variable revenues but that achieving actual balance should not be the target. The proper policy target is full employment.

If policy is well-designed with respect to automatic stabilization, and especially by adding a JG, it is possible to operate an economy at optimal output and full employment, while moderating inflation fiscally. The JG serves as a price anchor tethered to the cost of labor.

If deficits result, they are "good deficits" resulting from good policy, rather than being "bad deficits" resulting from automatic stabilization even in the face of policy austerity.


Tom Hickey said...


The "one weird trick" is accommodating saving desire to counter demand leakage to saving based on the accounting identity, government balance + nongovernment balance = 0, which implies that the government balance is the inverse of the nongovernment balance, so that if nongovernment chooses to run a surplus, then government must run a corresponding deficit to address demand leakage to saving and maintain effective demand at full employment, which optimizes output.

This is of particular importance to countries with a chronic CAD that leak demand to the external sector. Imports are a real benefit only at full employment of the importing economy will not only leak demand but also "export jobs" to the exporter through embedded labor as ersatz immigration.

So, if unemployment is chronically high or the economy threatens to underperform owing to demand leakage, then the fiscal stance can be loosened. If inflation threatens to increase excessively owing to tight labor conditions, this can be addressed by tightening the fiscal stance — rather than jacking up the interest rate, which involves government increasing spending on interest, which in turn is a factor promoting inflation from the side of government.

What about stagflation? If the inflation results from supply shortage, then institutional means can be brought in to address it. This was the policy during WWII when John Kenneth Galbraith was in charge of that program. The 70's oil crisis resulting from the cartel embargo broke after the US deregulated natural gas and a supply alternative became available.

This only works for currency sovereigns that have an effective monopoly over their currencies and understand the implications of this and also choose to use it. This provided the greatest amount of fiscal space in which to address public purpose through public policy.

Countries that don't issue their own currencies, that undertake obligations denominated in currency they do not issue, and don't float their currency are fiscally constrained and do not have the same policy space that currency sovereigns have. This includes US states, which use the USD but don't issue it, members of the EZ that have ceded monetary sovereignty to the European Commission and the ECB, and countries like China that peg.

I did I forget anything?