Dear Trond
>Concerning the question of what level of gvt. deficit and/or debt ratio is
>"unsustainable": As long as we consider the gvt. and the CB to be a single
>unit, "a deficit" simply means that more HP money is created in the period
>than destroyed (if I understand this right). There is no need of issuing
>gvt. bonds to cover the "deficit".
The "orthodox" approach utilises the Government Budget Constraint (GBC) to
analyse this issue.
The terminology is important b/c they wish to draw a (false) analogy
between the private agent
that they parade in their microeconomic theory (who in a user of the
currency) and the government
(the issuer of the currency). they wish to "trick" you into believing that
both are subject to the same
"micro" constraint on their spending. we all have budgets, no? etc etc....
students then get lured into
a range of outrageous claims about "governments spending beyond their
means", "bankrupt governments",
etc. This approach is then used to justify the persistently high
unemployment that governments have
imposed on economies over the last 27 or so years. It has also been the
basic justification for the rise
of Third Way approaches (Social Entrepreneurship, New Regionalism) and all
the derivative plagues that
have struck "labour" political parties over the last 15 years.
The GBC is thus presented an ex ante financial constraint that disciplines
the "prolificacy" of government.
In fact, it is only an ex post accounting statement that has little
interest beyond that. The only constraint
on government spending is real - the ability/willingness of the
non-government sector to exchange goods
and services in return for government issued currency. In general, this
willingness is strong because (a)
the private sector requires "government" money to discharge their tax
liabilities, and (b) the same sector
desires to net save in the unit of account. So you can also draw another
inference from (a) and (b), and that
is that generally a government deficit will be required to maintain full
employment. All this stuff about
balancing the government budget over the cycle misses the importance of (a)
and (b). It would imply that
over the cycle the non-government sector desires zero net saving of the
unit of account (an average). unlikely.
>The only reason to uphold a certain "buffer" of outstanding gvt. bonds then
>seems for the gvt./CB to have an additional and fast economic control
>instrument (through sales or purchases of same) in addition to the much more
>sluggish control instrument of the gvt. budget. Gvt. bonds are not needed to
>finance gvt. "deficits".
Randy replied this morning:
>The CB
>sets the overnight interest rate target. in a country like the usa
>bond sales/purchases by fed or treas are used to maintain that target.
>however, bonds are not needed to do so. canada and oz simply do it
>by paying the target rate on reserves (and charging the target rate
>plus a few bp on overdrafts). so govt bonds aren't even needed
>to do what trond suggests--using monetary policy (adjusting overnight
>rates) to control the economy. (i will leave aside my doubts that
>this would be desirable, in any case)
I also mentioned this in an earlier post, saying:
"In Australia, unlike Japan and the USA (as examples), the RBA pays a
support rate on
overnight reserves at 25 basis points below the current target cash rate.
So if the
liquidity injection via net government spending is just above the amount
they drain via
bond sales (say), then the RBA will be unable to hold the current target
cash rate and
unless they altered the support rate, the cash rate and the support rate
would converge."
This support policy is already a basic part of the operations of the RBA
and is all you
need. There is absolutely NO need to issue CGS at the longer maturities nor
at the short
end of the yield curve.
While Tony has touched on the portfolio adjustments he is worried about in
the articles
he has referred list members to, he has not addressed the basic question in
any of those
offerings, which is:
WHY ISSUE DEBT AT ALL when you have a reliable and effective support policy
operating?
So before you get into the gymnastics of optimal debt ratios you have to
come to terms with this
prior issue ... debt is issued to support the yield curve. you can do that
at the short end (which is
the relevant end for monetary policy) via the support policy of the RBA so
therefore you don't need
the debt issuance.
This is especially important giving all the "side-effects" that debt
issuance has that I raised previously
(supporting unproductive speculation, supporting an industry of financial
commissions, marketing fees,
etc, providing private wealth holders and foreign wealth holders with a
guaranteed government annuity,
etc ... for no purpose).
It is not just about being "correct". It is also about the desirable
conduct that progressive economists
want government to pursue. If you want government to conduct interest rate
support for its monetary policy by
issuing CGS (one "correct" way to ensure you hit the RBA cash rate target)
you have also recognise that this
has the additional effect of offering a market distorting risk free income
guarantee
to wealthy speculators etc. So fine if you are happy with the "package" -
advocate the continuance of
the CGS market. I just don't see that as advancing the goals of full
employment and equity.
>The sustainability issue then seems to disappear for the gvt. deficit- and
>debt ratio The amount of HPM in circulation increases, but gvt. debt does
>not. The remaining sustainability problem is not gvt. debt and deficits, but
>inflation and the exchange rate.
Once we get over the hang up about government having to finance spending ..
and accept that
government cheques do not bounce then we are free to discuss a range of
interesting
issues concerning the consequences of net government spending (deficits)
and such things
as the portfolio adjustments of private agents, wealth changes, spending
pattern adjustments,
price level movements etc. All valid progressive dialogue but totally
divorced from the "financing"
mythology.
>--o0o--
>
>Now, to Tony, who mostly replies by referring to papers of his and C.
>Panico. While I agree with him that people should read papers of those they
>(seem to) disagree with, I think it is to go too far to suggest that mailing
>lists are not suitable for discussions between academics in a field. I think
>that both Bill and Randy have disproven this by enabling other participants
>on this list to grasp some of their main points -- and see that there are
>obvious very interesting disagreements in the heterodox camp -- without
>having to read their papers and/or book(s) first. Again, this is not to
>denigrate published work.
Tony's E-mail raised the issue of modes of dialogue. I guess my view is
that E-mail discussion lists
are not as good a means to advance discussion as sitting in a room with
some nice people with unlimited
amounts of time and plenty of good will. But they are better than not
exchanging ideas at all. They are
better in many ways than the "question time" that is permitted at the
standard conference, for example.
We can, at our own pace and leisure, type our thoughts and send them to
many people for consideration.
They can read them, muse about them, and reply or engage as they desire.
Not perfect, but better than
nothing.
As to Tony's "moral obligation" concept .... he mentioned that he didn't
feel under any "MO". surely not.
But I guess something that I consider is this. There are very few
progressive economists who hold senior
academic positions in Australian universities. The dominant paradigm has
done its work as one would expect.
Of the few of us who hold professorial chairs or close I sense a
responsibility to push debate and
develop a firm "progressive" foundation so that my younger (junior)
colleagues might prosper from my endeavour.
The more PhD students we get into academic posts across the tertiary sector
and into government policy making
areas the more chance there is of changing things over time. Policy
reflects the outlook and training of the advisors
and the research that they read. If we really want to change things then we
have to challenge the existing paradigm
and make sure we have a consistent (conceptual and empirical) alternative.
So I think having a discussion list
is useful not only to resolve the internal issues that divide us but also
to let the thoughts and work of the senior
progressive colleagues work their way down to those just starting out to
provide some framework and leadership.
If that is a MO then I accept it.
As to what we call ourselves (heterodox, orthodox etc), this is a furphy
really. The real attention should be on
the need to develop a consistent set of concepts and modes of analysis that
cannot be subsumed into mainstream
theory as special cases. The model of the monetary economy that Randy,
Warren and myself advocate is a good
starting point for any progressive economist who wants to empower
themselves against the orthodox NAIRU approach
to short-run and long-run analysis.
best wishes
bill
William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle, NSW, Australia
E-mail: ecwfm@alinga.newcastle.edu.au
Phone: +61-2-4921 5065
Fax: +61-2-4921 6919
Mobile: 0419 422 410
http://e1.newcastle.edu.au/economics/bill/billeco.html
http://www.billmitchell.org
Received on Fri Jan 31 00:54:28 2003
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