matthewr
spɹɐʍʞɔɐq spɹoɔǝɹ ɹnoʎ sʎɐld
This is standard part of Keynesian thought and hence why Krugman (and me!) have been endlessly pointing out that the deficit is ultimately money we owe ourselves for decades.
The Fight for the NHS/MMT economics
- Thread starter ks.234
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This is standard part of Keynesian thought and hence why Krugman (and me!) have been endlessly pointing out that the deficit is ultimately money we owe ourselves for decades.
matthewr
spɹɐʍʞɔɐq spɹoɔǝɹ ɹnoʎ sʎɐld
I prefer raising unemployment benefits to living wage levels and spending money on education and training and other productivity enhancing programs with strong north of 1.0 multipliers.
I think a wealthy economy like the UK can easily afford this by better using fiscal space and a much more progressive tax system.
ks.234
Half way to Infinity
I thought that one area where Keynesianism and MMT agreed was that there is no fiscal constraints on government spending, apart from the fiscal constraints of over spending? So unless the JG or for that matter the UBI involves overspending, what’s the problem? Surely the point is, in either MMT terms or Keynesian terms, that a wealthy economy like the UK can afford whatever it wants (in £’s) up to the point that it causes economic imbalance ?
matthewr
spɹɐʍʞɔɐq spɹoɔǝɹ ɹnoʎ sʎɐld
They agree that government that prints the currency in which its debt exists cannot go bankrupt because by definition it can always print enough money to pay its creditors (which is largely its own citizens anyway who then spend or invest that money in the economy). And that because of this government debt is different from private sector debt which can cause a crisis particularly when there is lots of leverage, moral hazard and lack of regulation (e.g. essentially the GFC).
But they also believe that when we are not in a recession debt can get out of control and become inflationary and needs to be controlled by fiscal and monetary policy. Exactly what those limits are, is basically the meat and potatoes of current academic discussion and a rapidly evolving idea.
There was a famous (at least within economics) lecture by Olivier Blanchard a few years ago that argues that the real rate of interest is almost always lower than the real rate of economic growth and therefore there is no long run problem public debt problem and fiscal policy should be much more generous than previously thought.
laughingboy
pfm Member
I'm not saying anything different: I'm saying that on its own it doesn't stick. What makes it stick is a framework to hang that abstract statement on - something to make it concrete. For economists, this is irrelevant: it sticks because most of them have the principles of double-entry bookkeeping or similar to call on.
I'm saying that, to communicate with non-economists, the most immediate framework on which to hang the statement is the sectoral balance framework (partly because you get a lovely chart to make it nice and easy for the slow kids at the back, like me). You can visualise what the words describe:
- government spending is someone else's income, which means a government deficit is someone else's savings.
None of this is inconsistent with mainstream Keynesianism; it's just that the sectoral balances framework is not part of the standard Keynesian analytical toolkit, so Keynesians don't refer to it when explaining themselves to non-economists. MMT, by contrast, uses it all the time. Laypeople love it.
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ks.234
Half way to Infinity
Why can’t we afford raising unemployment benefits, a job guarantee and education without the need to raise tax? Isn’t the point of Keynesianism that government spending is not dependant on tax?
What’s tax got to do with it?
ks.234
Half way to Infinity
Yes, +1 for the kids at the back!I'm not saying anything different: I'm saying that on its own it doesn't stick. What makes it stick is a framework to hang that abstract statement on - something to make it concrete. For economists, this is irrelevant: it sticks because most of them have the principles of double-entry bookkeeping or similar to call on.
I'm saying that, to communicate with non-economists, the most immediate framework on which to hang the statement is the sectoral balance framework (partly because you get a lovely chart to make it nice and easy for the slow kids at the back, like me). You can visualise what the words describe:
- government spending is someone else's income, which means a government deficit is someone else's savings.
None of this is inconsistent with mainstream Keynesianism; it's just that the sectoral balances framework is not part of the standard Keynesian analytical toolkit, so Keynesians don't refer to it when explaining themselves to non-economists. MMT, by contrast, uses it all the time. Laypeople love it.
Jim Audiomisc
pfm Member
A problem in the UK is that Westminster always regards 'Local Government' as a whipping boy which they aim to ensure is always under-funded whilst being given onerous tasks to perform. e.g. they get lumbered with a lot of the responsibilty for 'social care' but have a capped ability to increase local tax, whilst national payments to them stagnate.
ks.234
Half way to Infinity
Please forgive me for revisiting your post after all this time, but it’s been bothering me.
My initial response to your post was unbalanced. I suggested that the people you know in hospitality had a poor business model if it depended on cheap labour. While I stand by that statement, it has to be said that their business model was built on the economic conditions where the price of waiters and bar workers and cleaning staff was what it was. Not their fault, they were just operating in the operational conditions of the time.
AIUI, the concern of raising the wages of those waiters etc is that is causes price inflation?
If that is the concern, isn’t the whole point of any economically responsible government to strike a balance between the money in peoples pockets and prices for things they want to spend that money on?
Isn’t our economy built on buying and selling?
There are strong competitive urges on both sides of that equation. So isn’t the role of government, as the issuer of money sitting on top of and separate from the non government sector in which capitalism red in tooth and claw rages in all it’s blood and glory, to balance those two urges in favour of a more predictable, less turbulent, future?
We have a situation now where wages are on the increase, and the monetarist conclusion is that rising wages will cause run away inflation, wheelbarrows full of cash, catastrophe and World War III.
But what happens to your hospitality owner if everyone’s wages increase to a level that punters can afford the necessary price increases for that hotel, restaurant or pub? Haven’t we been there before? Wasn’t there a time when there was equilibrium between the price of a pint and my ability for afford it? Is such a balance so unimaginable?
So, apologies if I seemed dismissive of the plight of your friends in hospitality, but the cause of your friend’s plight is the thinking that informs our economy at present, and the solution is to change that thinking.
Isn’t the purpose of government is to balance the economy by considering all actors in that economy?
Heckyman
pfm Member
Not sure why it gives the impression that money is created by government spending, it's actually done via commercial bank lending.
In the English-speaking world, property costs are the biggest overhead in restaurants. If rents and property costs were to come down and stay down, it would be possible to run a restaurant at a profit, pay the staff a good wage (and more importantly, retain good staff) and sell food at an affordable price. There’s no magic to it, and if you go to Continental Europe, you can see that exact combination in action.
For some reason the negative connotations of the word “inflation” in English are negated when preceded by the words “property price”. One of those strange English idioms that doesn’t translate to other languages, I suppose...
For some reason the negative connotations of the word “inflation” in English are negated when preceded by the words “property price”. One of those strange English idioms that doesn’t translate to other languages, I suppose...
ks.234
Half way to Infinity
Is it?
Heckyman
pfm Member
Yes!
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
"This article explains how the majority of money in the modern economy is created by commercial banks making loans."...
ks.234
Half way to Infinity
Yes. You hit on another Very English Confusion. Inflation is bad, really, really bad. It causes unimaginable problems, chaos and Armageddon
Unless it’s property prices, when it’s a good thing that investments are built on and the foundation of all that is great and good?
ks.234
Half way to Infinity
But surely the take away from that is, “The amount of money created in the economy ultimately depends on the monetary policy of the central bank.”.
laughingboy
pfm Member
Here's the MMT logic, as I understand it.
Although banks create a lot of money in the modern economy, when they do so they create an asset and a liability - they credit your bank account and debit their asset account. That's the principal on the loan. No net financial asset has been created - the asset is matched by the liability so no wealth has been created. But, as you know, there's also an interest element, which does represent new wealth for the bank. So, the question is, if the banks don't create the interest that needs to be paid to them to fulfil the terms of the loan, where does it come from?
Well, it can come from money in circulation from other loans, but - in aggregate - all of that credit/money is already earmarked - it is required to repay the principal of the other loans. So there must be another source of money, otherwise - in aggregate - the interest wouldn't get repaid. Here's the important bit: apart from loan creation, there's no other mechanism for the private sector to create credit/money. So it can't come from within the private sector. It must come from one of two sources: either the external sector or the government.
Ultimately, there is no other mechanism for the external sector to create credit/money in our currency, either. In the short run, money that was held overseas can make its way back into the domestic economy, but it is not the ultimate source of that money. That leaves us with one other source of money: government. The government can create money. The government deficit (the difference between government spending and taxation), in the final analysis, has to be the source of the 'missing' money.
So, to answer your question: transactions within the domestic private sector don't show up on the sectoral balances graph - for the most part the assets and liabilities cancel each other out, so they can in effect be ignored. The model Kelton sets out is just a way to make all of this more understandable.
Tintinabulum
pfm Member
My observation is that stuff happens for a mixture of (barely connected) reasons. Then people (experts) explain why it happened and eventually come up with a perfect theory which fits what happened. Then more stuff happens which doesn't fit in, then we get another theory. A lot of randomness going on, economic experiments (ie run out of ideas so press some buttons). It's really very simple. People make careers out of head scratching, journalists, economists. It's a business. There, 2p.
Heckyman
pfm Member
Simplifications aside, I think Kelton is not describing the current monetary system, but is rather suggesting an alternative.
There are interesting precedents, such as the Swiss "Vollgeld" proposal (rejected in a referendum), which was the subject of lively debate a few years ago.
There are interesting precedents, such as the Swiss "Vollgeld" proposal (rejected in a referendum), which was the subject of lively debate a few years ago.
Heckyman
pfm Member
The amount of money created in the economy ultimately depends on borrowers' demand for loans and the banks' assessment of the borrowers being able to repay them. Thus the growth in the supply of money is roughly in line with the growth of the real economy. Central bank policy plays more a regulatory role in ensuring the stability of the system.