Re: Re: Much ado about nothing?

Dear Trond

I covered some of these issues in an earlier post. I also hope that readers
also consult the CofFEE submission to the same debt management inquiry
being conducted by the Commonwealth Treasury.

>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.

The comments you cite came from the Evatt Submission in the section written by
Frank. I believe they are in the orthodox Keynesian tradition which (a) is
based
on an old exchange rate regime; and (b) believes that there is a government
budget constraint.

The tradition then has a number of "defensive" ways of justifying issuing
government
debt to support net government spending. I believe the "defensiveness" is a
poor
strategy when tackling the macroeconomics debate that is dominated by orthodox
GBC (monetarist/neo-liberal/call_them_what_you_like) economists.

> Indeed, it may be but, LIKE personal and
> >corporate debt, whether public borrowing is wise or unwise depends on the
> >purposes for which the debt is used.

NO! (we have had this argument):

there is no analogy between debt issued or entered into by private
(currency-using)
agents and the Fed Government (currency-issuing). the former is to
"finance" deficit
spending units, the latter essentially is an act of monetary policy to
underpin the yield
curve at whatever maturity the debt is issued.

>There is an added social dimension too
> >because of the essentially collective character of governmental
> >expenditures, whether financed by debt or otherwise. GOVERNMENTS CAN
> FINANCE
> >THEIR EXPENDITURE EITHER BY TAXES OR BY BORROWING, and usually do so by a
> >mixture of the two.

NO! (we have had this argument).

Federal Governments do not need to finance their expenditure.
Taxes and debts serve other functions totally removed from any notion that
government
is like a household.

>The latter has more obvious logic when the form of
> >expenditure involves capital investment, rather than spending on, say,
> >social security payments. In other words, forms of expenditure which
> enhance
> >the nation’s infrastructure, and from which future generations can benefit,
> >are appropriately financed by public debt. That, at least, is the
> >conventional wisdom which neoliberal ideology and practices challenge.

NO!

This is the old Keynesian (deficit dove) line relating to matching
"financing" with the time
horizon of the spending. Somehow it suggests that this is prudent because
the benefits
of the spending accrue at different periods and so you don't want spending
that is "gone"
being "paid for" later. The argument is false and hampers the progressive
attack on
macro orthodoxy that continues to deliver unacceptable levels of
unemployment (defined
as any unemployment beyond around 2 per cent).

Repeat: There is no financing imperative. More below.

> >>Of course, government borrowing involves a cost ­ the interest payments on
> >government bonds, for example. That is usually said to be the main reason
> >for seeking debt reduction.

NO!

The only cost that is involved with government spending is the real
resources that the economy
allocates to making the goods and services that the spending transfers into
the public sector
for redistribution according to politically-set priorities. All spending in
that regard involves a real
cost and the allocation of those resources (b/tw public and private
sectors) will then reflect a
combination of market and political choices.

There is no cost in paying interest on government debt in the sense implied
by Frank. The payments
only amount to an accounting entry at some bank. Costless electronic
action. To keep saying
(or agreeing) that there is a cost implies that there is a financing burden
which will reduce the capacity
of government to spend in the future (or now).

>But whether the interest constitutes a ‘burden’
> >depends upon how it compares with the social benefits arising from the
> >government spending. As in the case of the carpenter’s personal debt, the
> >interest payments are not a net burden if the future income-generating
> >capacity is enhanced.

NO!

Again a false analagy btw the private (household) sector (the currency
users) and the currency issuer
is being made. This is the classic Keynesian defense of debt. It says "well
BHP borrows and makes
a return and everyone thinks that is good business practice. So the same
should apply to Government"

Definitely not. (a) the Govt is not in a business; (b) it doesn't have to
borrow to spend unlike BHP
or any currency-using agent (either borrowing externally or using retained
funds - same thing really -
it all requires financing); (c) crucially, the rate of return on any public
sector capital formation that arises
from G spending will accrue as a consequence of the spending quite
independent of whether there
is debt issued or not. with no debt issuance (to support monetary policy
targets) if the government
has built a nice capital project then the returns will be there. There is
no further justification needed.

> >So, as with personal and corporate debt, there are complex arguments about
> >the ‘good’ and ‘bad’ aspects of public borrowing. THE ALTERNATIVES ALWAYS
> >NEED TO BE CONSIDERED. WOULD FINANCING PUBLIC INVESTMENT THROUGH HIGHER
> >TAXES RATHER THAN DEBT BE A BETTER ALTERNATIVE? That option deserves
> serious
> >consideration. However, it currently seems to have few supporters, as a
> >result of the seemingly widespread belief that higher taxes are a political
> >‘no-no’. BUT IF THAT OPTION IS ELIMINATED, REDUCED GOVERNMENT BORROWING
> >MEANS LOWER CAPITAL EXPENDITURE. So the deterioration in public
> >infrastructure ­ in the quality of ‘public goods’ in general ­ is a direct
> >consequence of the commitment to debt reduction. Thus the ultimate ‘logic’
> >of the neoliberal program is the hollowing out of the public sphere of the
> >economy and society.

NO! Definitely not. Reduced capital borrowing just means monetary policy
targets may have
to be achieved through the RBA support policy on excess reserves held by
member banks.
It also means that the financial market speculators have to find different
instruments to use
as a risk-free benchmark to price their products etc... it also means there
are less govt annuities
about that make unproductive speculation easier to engage in.

Alternatively, lower capital expenditure is purely a function of the
political choice made by government
on the level of spending they choose. The two (borrowing and spending) are
technically unrelated
and progressives should hammer that home. There is no GBC!!

The deterioration in public infrastructure is b/c of a lack of spending not
a lack of "finance".
we continue to elect governments that make the political choice to run
surpluses which systematically
destroy the credit structure (and savings) of the private sector (that is,
run down our private wealth)
in the false believe that they are creating public savings that will help
in the future. There is no
tin shed in Canberra where these surpluses are stored. The money taken is
destroyed every minute
the surplus is maintained. The fiscal drag then maintains unemployment
higher than it should be.
The only reason unemployment is not much higher than now is because the
private sector is
going increasingly into debt. The fragility of their balance sheets appears
to be starting to unwind
if you read the financial papers and then the fiscal drag will really start
to impact and the government
will end up in deficit whether it wants to be or not. although then the
unemployment rate will be much
higher than now.

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 Wed Feb 12 23:51:44 2003