Can I add something to Bill's post.
It will come as no surprise that I agree with all the technical details of Bill's post.
I viewed Peter's summary as a positive advance and as an attempt to gently prod heterodox economists with a fairly general and hopefully not too controversial statement that we all know that a sovereign govt on a floating exchange rate does not need to "finance" its spending in the same manner as a household, firm, or nonsovereign govt (one that is dollarized or with fixed exchange rate--argentina or euroland) has to do. This view, I think was widely accepted in the 1950s, and even taught in USA macro courses through the early 1970s. Unfortunately, of course, it is no longer taught much of anywhere. I also think that the technical details to which Bill refers were beyond the grasp of most even in the 1950s and 1960s (and, as countries operated with a different exchange rate regime, these technical details were not strictly applicable). I have been coming to Oz for a number of years and I do notice a convergence on these matters, although Bill has pointed out specific cases where controversy remains.Now that
we all (or almost all?) accept the general statement made by Peter, we need to work on developing an understanding on all the technical issues raised by Bill, and, of course, the policy implications that follow on.
randy
-----Original Message-----
From: Bill Mitchell [mailto:ecwfm@alinga.newcastle.edu.au]
Sent: Thu 1/16/2003 8:22 PM
To: she_forum@adam.itk.ntnu.no
Cc:
Subject: [HE] Re: Report on ASHE Conference
Peter in his report on the recent Sydney gathering noted:
>Throughout the conference a number of themes emerged. The first was the
>general agreement that federal government deficits were needed during times
>of unemployment. The nature of the deficit was more controversial, but most
>speakers agreed that government spending, especially on infrastructure,
>health and education, the last two (particularly in the Anglo-Saxon
>countries) was needed. We were reminded that governments do not need to
>"finance" their expenditure as such. Government expenditure occurs via
>Central banks creating liabilities against the government, which, of course
>directly influence the money supply. Taxes and/or borrowing from the
>private sector do not finance that expenditure in the way in which
>households finance their expenditures by income or borrowing. Rather, they
>have the effect of undoing the increase in effective demand originating
>from the original expenditure.
I was unaware that there had been a consensus about the issue of
"financing". In fact,
judging from the papers at the conference (and related publications
elsewhere from
conference participants) I would say that this matter is far from agreed. I
would also argue that
a failure to accept these propositions as an accounting truth and exact
description of the way
the banking system and monetary policy functions in an economy with a
flexible exchange rate
is the principle reason that progressive economists fail to make any
headway in the macroeconomic
policy debate.
The paper from John King, for example, about what a heterodox policy should
look like was couched
in terms of taxation revenue (and reforms to make it work better) being
needed to "finance" net government
spending. Heterodox economists (for example Tony Aspromourgos and Frank
Stilwell) have recently
through the Evatt Foundation submitted a paper to the Commonwealth
Treasury's Debt Management Review.
That paper talks about "financing" and "optimal debt ratios" in terms of
limitations on net government spending.
The submission from CofFEE (written by myself and Warren Mosler) is totally
at odds with this Evatt line
yet consistent with your statements above. It is interesting how fractured
the progressives are on this issue.
Our differences on macroeconomic policy are greater than the things that
bind us.
Readers are urged to go to
http://debtreview.treasury.gov.au/content/home.asp and then go to the
submissions
to become aware of this extremely crucial macro debate.
Tony also has criticised work of my own and Warren Mosler (and other work
by Randy Wray) for being wrong
to argue that their is no financial restriction on federal government
spending. (see for example, Australian Journal
of Labour Economics, June 2001 interchange).
The position of myself, Randy and Warren among others was publicly
criticised at the conference for being
conservative and coercive ... in the sense that we argue it is better for
the government to provide work for all
rather than leave the most disadvantaged and alienated of our community
without work. Our plan is also criticised
because the "resulting deficits will either create inflation if financed by
money creation" or "push up interest rates
because they need to be backed by CGS issues". These arguments were made by
"progressive economists"
at the ASHE gathering.
When I ask the proponents of these attacks how exactly "printing money"
works, there is a confusion expressed and
the opinions expressed contradict your correct observation above that bank
account adjustments underpin ALL
government spending whether there is debt subsequently issued or not.
When I note that budget deficits actually put downward pressure on interest
rates (not upward) and that debt issuance
is required if you want to run a positive cash rate target as your monetary
policy, once again there is denial. No debt
is about financing I am told. Absolutely not!! The government could still
spend just as effectively without any CGS issuance.
But the RBA might ring up Pete (Costello) and ask him why the Treasury is
making it hard for them to keep the
cash rate at the current level. If the non-government sector did not want
to hold the extra cash and sought to spend
it on consumption, for example, then well and good, the net government
spending level could fall and still maintain
full employment.
But the critics argue that there will be inflation instead and that budget
deficits cannot go on persistently. First,
the Job Guarantee outlay represents the MINIMUM net government spending gap
that exists and is required
to be closed to get us back to full employment (effectively the wages of
the workers and then some). Second,
the JG does not preclude other "political" decisions like increasing
outlays on education, transport, health etc.
The old-fashioned Keynesian remedy seemingly still very much in favour of
the ASHE majority. But if the JG
is to be inflationary (not!) then the much larger expansion implied by
generalised public expansion will be more
so. You cannot have it both ways. It sounds often to me that the critics of
the JG on inflation grounds are really
just advocates of the NAIRU-paradigm.
Third, to then argue that you need some sort of debt issuance to fund this
expenditure is missing the point
of the expenditure gap in the first place. The unemployment and GDP gap is
because there is a net government spending
gap (MACRO101). To spend and then take it back via tax or debt is
counterproductive and a denial of the problem
in the first place.
Once progressive economists couch their macro analysis in terms of what has
been called "deficit dove" jargon
(need for sensible debt/gdp ratios, deficit/gdp ratios etc as policy
targets) then the debate against the Treasury/NAIRU
line has been lost. No more discussion needed.
In fact, the budget deficit is a largely irrelevant aggregate to focus on.
It is just an ex post accounting statement
of the private sector spending patterns. If the private sector hate
deficits then they can do something about them ....
just spend more themselves
So I would be delighted if a consensus was reached on these issues. Then we
could all (together) agree that
budget deficits are generally required (not just when there is unemployment
- which is getting it around the wrong
way). Unemployment always is a signal that net government spending is too
low relative to the level of taxes and the
desire of the non-government sector to net save in the unit of account.
That is what I hope we all teach in Macroeconomics
101.
best wishes
bill
------
William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle
New South Wales, Australia
E-mail: ecwfm@alinga.newcastle.edu.au
Phone: +61-2 4921 5065
Fax: +61-2 4921 6919
Mobile: 0419 422 410
http://econ-www.newcastle.edu.au/economics/bill/billeco.html
http://www.billmitchell.org
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Received on Fri Jan 17 09:17:33 2003
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