Economics
Thursday, 11 February 2016 - 1:39pm
I'm reluctant to contribute to the Piketty backlash, as it seems to me to be mostly motivated by the unrealistic expectation that his book should have provided a comprehensive theory of everything. However this blog post from Alexander Douglas provides such a pithy account of the workings of public fiscal balances that it's worth recirculating. In response to the claim that "there are two main ways for a government to finance its expenses: taxes and debt," he writes:
Government spending isn’t financed by anything. The government pays for everything by crediting the non-government sector (employees, companies, foreign governments, etc.) with financial claims. Some of these claims are returned to the government in order to settle liabilities to the government (for instance in tax payments); others remain as financial holdings for the non-government sector. At any given moment the claims remaining as financial holdings constitute the whole of the ‘public debt’.
Tax revenue largely depends on the volume of spending. Decisions to spend rather than save are largely at the discretion of non-government agents. It is therefore very misleading to speak, as Piketty does, as if the government chooses to ‘finance its spending’ through taxation or debt. The amount of government spending that remains as ‘debt’ is largely up to the discretion of non-government agents choosing whether to hold onto financial claims or pass them on so that they can eventually find their way back to the government.
It therefore makes no sense to panic about government "budget" deficits, if you're not also going to bemoan private savings. Ironically, as it happens, private savings currently is a big problem, as corporations hand out mattress stuffing — in the form of dividends and share buybacks — rather than investing. Yet more ironically, the appropriate response is for the government to make up the investment shortfall through large fiscal deficits. Otherwise the economic stagnation rolls on until (sorry, I can't resist it) r>g.
Corbynomics and People's Quantitative Easing (PQE)
I don't quite follow all of this, as I'm pretty ignorant of how central banks actually function, and also there are some graphs in it; my brain shuts down as soon as it sees a graph.
The take-home message though seems to be this: there are three superficially distinct ways in which a government could finance investment to kick-start an economy in times of depression, recession, or "liquidity trap". You can use Plain Vanilla Deficits (PVD - spending more money than you take in because you're the government and you can), Overt Monetary Financing of Government (OMFG - getting the reserve bank to give you the money before you spend it, because you're the government, etc.), or People's Quantitative Easing (PQE as proposed by Corbyn - getting the reserve bank to give money to a new National Investment Bank, which will fund your worthy causes, because yada, yada). The practical differences all seem to come down to precisely who it is that signs their name on the "give me money, please" chitty, and how many carbon copies you need. Presumably, among better informed people than myself, one of these options looks more politically acceptable than the others, which will all turn your hair instantly white with shock.
Where any of these differs from "traditional" Bernanke-style Quantitative Easing, is that QE just has the reserve bank standing out on the street corner shouting "Free money! Get yer free money over here! Great big wads of it!" to passing private investors. When these investors don't want to sink any money into anything productive because they're terrified that, for instance, the other post-2007 shoe is about to drop, they won't take the money at any price, and you've achieved nothing. Worse, what money you have managed to offload has probably gone into unproductive rent-seeking and/or speculative activity by people wealthy enough to handle the losses of playing in the casino economy. Thinking that some sort of democratic process could possibly reach a consensus on useful ("shovel-ready") public projects to finance (by putting a positive number on one side of a balance sheet and an equivalent negative value on the other side) may sound wildly radical, but it beats investing in a dole queue.
More at NEF: "The Bank of England’s own research indicates that just 5% of households own 40% of the assets boosted [by 2009-2012 QE]. QE became a way to shovel more wealth into the hands of the already wealthy."
And here's Simon Wren-Lewis on Central Bank Independence and MMT: "A National Investment Bank can be set up perfectly well based on borrowing from the market, and you can ensure it gets the funds it needs by a government guarantee. The only reason you would avoid trying to do that is because the NIB debt would count as part of the government’s deficit, and you were worried about the size of the deficit. The last people who should be worried in this way are followers of MMT. " Yes, but politics. I think there's something to be said for having a clear public distinction between consumption and investment, even if in reality it's a purely a matter of accounting.