Why the US Gov. is not like a household. Or, "Further evidence undermining the mainstream case ..." - Politics Forum.org | PoFo

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#15144620
Further evidence undermining the mainstream case against fiscal deficits

From Bill Mitchell's blog 12/23/20. I reformatted it a little and added some emphasis.
The mainstream belief is based on the erroneous conflation of a household and government budget.

So when a household/firm borrows now to increase current consumption (or build productive capacity) there is a clear understanding that future income will have to be sacrificed to repay the loan with interest.

This result follows because spending by the non-government body (household and/or firm) is financially constrained. A household must finance its spending either by earning income, running down saving, borrowing and/or selling previously accumulated assets. There is no other way. Borrowing has to be repaid via access to the other sources of spending capacity but by implication such repayments reduce the future capacity to spend.

This is translated (erroneously) into the public sphere with the claim that governments have to pay the debt back in the future by increasing taxes. The consumption benefits of the higher spending now are enjoyed by us and our children pay for our joy by facing higher tax burdens. That is the nub of the mainstream argument.

But do our children forego real consumption in this way? Answer: no!

If our children produce $x billion in real GDP in 2025 all of that flow of real goods and services (and income) will be available for consumption should they choose to do that. They probably will save some of it (especially if the government runs a deficit of sufficient magnitude to fill the spending gap left by the desire to save by the non-government sector).

But the important point is that real GDP is not a reverse-time traveller. There is no government agency collecting real output to “pay back past debts”.

...

The public debt ratio has no bearing on any of this. The only possible burden on our children relates to my term “environmentally-sustainable” which includes consuming through time within the limits of real resource availability.

If the current generation cruels the world’s environment and exhausts finite resources then unless technology changes dramatically (for example, to use different energy sources for transport, etc) then our children will not enjoy the same lifestyle that we enjoy (using enjoy liberally!).

But that conclusion relates to competing uses of real resources. The public debt ratio has nothing to do with that possibility.
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Link to the full article.
http://bilbo.economicoutlook.net/blog/?p=46566
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#15144646
The conventional economic belief is that if you just issue more money to pay for things, it will cause inflation.

Wealth will not be created; it will just be moving purchasing power from one part of the economy to another.


Obviously there is a debate about whether issuing more free money will always cause inflation, with economists from different schools of thought disagreeing. The Monetarist economists are the main economists who believe you can get away with creating more money without that having a proportional inflationary effect.
#15144648
Steve_American wrote:The public debt ratio has no bearing on any of this. The only possible burden on our children relates to my term “environmentally-sustainable” which includes consuming through time within the limits of real resource availability.

I question the exact way that "limits of real resource availability" fits together with this idea of adding more money into the economy.

I think the real question, if we can distill it down to its essence, is why you think adding more money into the economy would make the economy operate more efficiently than it already does.
#15144649
Steve_American wrote: There is no government agency collecting real output to “pay back past debts”.

I'll put it as succinctly as possible. If there is inflation expected at a future point in time, than lenders will demand higher interest rates now. They won't be willing to bid as much for Treasury bonds.

You could talk about the Central Bank being the one willing to lend this money, but then we are talking about the inflation argument.

For this reason, inflation is ultimately not really a legitimate way to pay off national debts.

(Unless we are talking about very fast sudden hyperinflation, but that would permanently ruin the country's credit rating, making it very hard or costly to borrow in the future. I'm assuming that's not what we're talking about)
#15144650
Steve_American wrote:But that conclusion relates to competing uses of real resources. The public debt ratio has nothing to do with that possibility.

On the contrary, I disagree. It is just a somewhat indirect connection, you just do not see it.

Assuming you continue to collect the same taxes as before, and assuming you do nothing to alter the money supply, then the public debt ultimately represents a claim on those resources. Think of it kind of like this: Holding bonds from the government is like an exemption from future taxation.

Now, if you are talking about changing tax levels, or altering the money supply, or having the Central Bank be the one to buy the debt, now we would be entering into other arguments.
Since you were not entirely clear in your opening post about whether your idea relies on these alternative possibilities, I will not go into them here.
#15144660
Puffer Fish wrote:On the contrary, I disagree. It is just a somewhat indirect connection, you just do not see it.

Assuming you continue to collect the same taxes as before, and assuming you do nothing to alter the money supply, then the public debt ultimately represents a claim on those resources. Think of it kind of like this: Holding bonds from the government is like an exemption from future taxation.

Now, if you are talking about changing tax levels, or altering the money supply, or having the Central Bank be the one to buy the debt, now we would be entering into other arguments.
Since you were not entirely clear in your opening post about whether your idea relies on these alternative possibilities, I will not go into them here.

Puffer Fish, you apparently missed that fact that most of my post was a quote from the MMTer, Bill Mitchell's blog.
#15144664
Puffer Fish wrote:The conventional economic belief is that if you just issue more money to pay for things, it will cause inflation.

Wealth will not be created; it will just be moving purchasing power from one part of the economy to another.


Obviously there is a debate about whether issuing more free money will always cause inflation, with economists from different schools of thought disagreeing. The Monetarist economists are the main economists who believe you can get away with creating more money without that having a proportional inflationary effect.

I didn't write it. I just agree with the 28 year old new economic theory known as MMT.

MS economists deny that banks create new money out of thin air with every loan they make.
You, like MS econ., don't realize that when banks make loans and add to the money supply, this doesn't cause inflation. And the $25 T of deficit spending since 1981 also doesn't seem to have caused much inflation. Also, the situation in Japan, where for the last 28 years its massive deficit spending has also not caused inflation. [Note that all central banks have the same inflation target of around 2%, not 0%.]

I tell you, and everyone, again; all economic theories are just "theories". That scientific theories stand or fall on the strength of the predictions that they make. I have asked here for some examples of good predictions made by MS econ. theories. So, far not one of you have come up with one example. Not predictions by individuals, but rather predictions supported by several Main Stream economists.
. . . OTOH, MMTers claim that MMThas made many such good predictions.
#15144673
Puffer Fish wrote:I question the exact way that "limits of real resource availability" fits together with this idea of adding more money into the economy.

I think the real question, if we can distill it down to its essence, is why you think adding more money into the economy would make the economy operate more efficiently than it already does.

I'm not an economist, but Ill give you my non-expert answer.
More money being added into most economies is a very good thing, because people save and buy imported stuff. Both of these reduce the money supply. Bank loans increase the money supply or a while, but soon banks slow their lending, this reduces spending, which reduces the growth in the GDP. The people are still making the required payments on their loans and this also reduces the money supply, which reduces spending. MMT econ. says that this process is what cause the normal 'business cycle'.

There is also the evidence of the 7 times that the US Gov. has has a surplus for over 3 years. while this is not the only cause of a Bank Panic or recession as 2008 demonstrate, every one of the 7 surpluses was followed immediately by a Bank Panic or recession, the last case was the dot-com bubble-recession of 2000 that followed Clinton's surpluses. Here, the surplus is removing money from the economy. After enough $$ has been removed, there has always been a recession.

MS economists would say something like, "those are just special historical events. they are not proof. where is your proof from 1st principals?"
. . . My response is, "Your 1st principals are often false assumptions. In logic, you can't prove a theory with false assumptions, and yet you do exactly that. And then, ask me to prove my theory in the same way." I make the scientific claim that scientific theories are more proven by experiments and historical events than by logical proof base on false assumptions. In so far as economics is a social science, then my method should be the method used.
. . . For example, several decades ago, it was common knowledge that aeronautical engineers had proven that the fat juicy bumblebees could not fly, and yet we could all see that they can fly. The theory being used to make that proof was obviously incomplete or wrong.

I suggest that Neo-liberalism and other Mainstream economic theories are obviously wrong. They keep making predictions about events that don't then happen. They make excuses, but they don't seem to ever be right. Like everyone who has set a date for the end of the world (dates that we have passed).
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#15144829
Steve_American wrote:You, like MS econ., don't realize that when banks make loans and add to the money supply, this doesn't cause inflation.

Actually, I do (generally) believe (private) banks adding to the money supply doesn't cause inflation.
But probably not for the reasons you do.

The way I see things, added private debt pretty much cancels out the increase in the money supply. Individuals are sort of just as likely to spend less if they are in debt as they are to spend more if there's more "money".

When private banks create money, that money is sort of "backed" by something (someone else's debt) so doesn't create monetary inflation.
#15144831
When you point out to situations where more money was printed but it didn't seem to cause observable inflation, my explanation for most of those situations is that inflation happened previously when there was an unsustainable bubble in the economy (usually the housing market in particular). When the economy began deflating (back down to normal healthy levels) then that would have resulted in inflation.

The reason people didn't actually see much inflation was that the inflationary effect of printing more money was cancelled out by the deflationary effect of the economy deflating.

And this is not merely a coincidence, but it's often an intentional policy of the Central Bank to try to prevent deflation at any cost, and prop up asset prices when they are headed downwards.

I am saying there is still a very real inflationary effect, but you just don't end up seeing it because it is covered up by a deflationary effect when economic times are not doing well.
But conventional conservative economists believe the people would be better off with a little bit of deflation, if prices were allowed to come down a little bit.
#15144843
Puffer Fish wrote:Actually, I do (generally) believe (private) banks adding to the money supply doesn't cause inflation.
But probably not for the reasons you do.

The way I see things, added private debt pretty much cancels out the increase in the money supply. Individuals are sort of just as likely to spend less if they are in debt as they are to spend more if there's more "money".

When private banks create money, that money is sort of "backed" by something (someone else's debt) so doesn't create monetary inflation.

So, we massively disagree.
The increase in debt has no effect on those who receive the money from the borrower, right.
If you agree that that is right, then you must think that the borrower will spend a lot less in the now to off-set the spending of those who got the money. I certainly didn't spend less because I knew I would have to pay the loan back over the next 10 years to 30 years. I assumed that I would get more income and make the payments with that income.

Do you have any actual evidence that other people behave that way, because I never saw any evidence of that, ever?

IMHO, both of those claims are just wishful thinking. A hope. Again I ask for actual evidence that that modifies anyone's behavior.
___________________________.__________________________________.___________

IMHO, the entire argument about increasing the money supply *will cause inflation, ignores the likely response that corps. would make to increasing demand, which is to increase output. So, as the money supply grows which increases people's incomes, capitalists respond by increasing the supply of stuff and services; and this is why we don't see much inflation as the US debt went from $1T in 1981 to $27T now. [Note that there are several ways to total the debt, so this figure is just I heard recently.]
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#15144845
Puffer Fish wrote:When you point out to situations where more money was printed but it didn't seem to cause observable inflation, my explanation for most of those situations is that inflation happened previously when there was an unsustainable bubble in the economy (usually the housing market in particular). When the economy began deflating (back down to normal healthy levels) then that would have resulted in inflation.

The reason people didn't actually see much inflation was that the inflationary effect of printing more money was cancelled out by the deflationary effect of the economy deflating.

And this is not merely a coincidence, but it's often an intentional policy of the Central Bank to try to prevent deflation at any cost, and prop up asset prices when they are headed downwards.

I am saying there is still a very real inflationary effect, but you just don't end up seeing it because it is covered up by a deflationary effect when economic times are not doing well.
But conventional conservative economists believe the people would be better off with a little bit of deflation, if prices were allowed to come down a little bit.

Like I said above, you are making excuses.
The prediction was that the huge amount of US deficit spending *would * cause high inflation.

Now you are arguing the the deficit spending was in response to a recession caused by a boom which causes deficit spending which should be causing high inflation, but it doesn't because it is just countering the deflation that might happen in a recession.
. . . Can you point to any evidence that this has happened at any time?
. . . Simple assertions like this should not convince anyone. Most people should need some logical step by step argument or some historical evidence to be convinced.

[A note to Puffer Fish and all Lurkers, I only see discussions on line are being like 2 lawyers arguing in front of a jury. The jury (here, the lurkers) is who I'm talking to, because it is very unlikely that I can get anyone to change their mind on line.]

Your assertion doesn't convince me. It does convince you. Again we disagree.

BTW --- right now the Repuds in the Senate are calling out future inflation and required tax increases as the reason to refuse to spend a lot more in this recession/pandemic. So, the Repuds don't agree with your argument, AFAIK.
________________________.__________________________________._____________

I'm not an economist, but my MMT experts tell me that the BoJ, the ECB, the RBA(Aust.), and the US Fed. Res. *all* have inflation targets of around 2%. If "conventional conservative economists believe the people would be better off with a little bit of deflation", then they have not convinced the leaders of those 4 key central banks. Therefore, I conclude that [most] "conventional conservative economists believe the people would be better off with a little bit of deflation" is just not a true statement. Maybe, some very "conservative economists believe the people would be better off with a little bit of deflation" is the true statement.
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#15144929
Steve_American wrote:The increase in debt has no effect on those who receive the money from the borrower, right.

Of course it does, but the increase in debt tends to have an effect on those who become in debt.

Imagine it this way: imagine getting into debt to yourself. Can we agree that would not have inflationary effect?


Adding money into an economy that is backed by something of equal value to the money that is already in that economy, does not cause inflation.
If money is backed by debt, then that money is sort of backed by the work obligation of the person who is in debt.

When we talk about government "printing money", on the other hand, what we are actually talking about is government printing money and not adequately backing it in proportion to what already exists. (This is the whole reason the government would want to print money to have money to spend)
#15144930
Steve_American wrote:. . . Can you point to any evidence that this has happened at any time?

Banks created "money" out of housing equity, which wasn't really sustainable. When the housing market dropped, and loan defaults began, suddenly that money was no longer there.
It was in bank accounts, but the mortgages held by the banks were suddenly not worth the amounts in the accounts.

If the Central Bank had done nothing, a huge amount of the "money" in bank accounts would have disappeared. Banks would not have been able to pay it.

This would have led to deflation, which many economists and policymakers were afraid of.

There are plenty of old articles you can find that explain that the "quantitative easing" polices of the Central Bank were in direct response to prevent deflation.


When you ask for "evidence", you can't expect me to write a long essay about this here with endless sources and citations.
You are going to have to be a lot more specific with exactly what sort of evidence you are asking for.
Otherwise we are just going to have to agree to disagree in this thread, since I am not going to waste the effort/time to "prove" this here.

I have simply suggested a reasonable possibility, which could explain the past observed outcome and still be consistent with my claim.
#15144932
Steve_American wrote:IMHO, the entire argument about increasing the money supply *will cause inflation, ignores the likely response that corps. would make to increasing demand, which is to increase output. So, as the money supply grows which increases people's incomes, capitalists respond by increasing the supply of stuff and services;

That's kind of a circular logic argument.
If increasing the money supply merely causes inflation, then increasing the money supply would not increase demand.
Prices would simply go up.

We also have to be a little bit careful/specific about how exactly we define the word "demand" in this argument.
I am claiming what is actually exchanged will basically be exactly the same, everything will just be denominated in a higher price amount.
#15144933
Steve_American wrote:Like I said above, you are making excuses.
The prediction was that the huge amount of US deficit spending *would * cause high inflation.

I believe that inflation can be seen in the lead-up to the housing bubble.
If the housing bubble had been allowed to deflate back down to normal sustainable levels, then that inflation would have gone away (would have then seen deflation), but it was not.

So in this case, the observable "effect" can be seen to precede the "cause".

It was just "hiding" in a temporary flux, which was the economic bubble.

If it were hypothetically possible to remove the economic bubble, and keep the other monetary policies in place, what I believe you would see is the typical printing lots of money, followed by inflation.


I know you do not agree, but was I able to explain that idea well enough for you to be able to understand it?
#15144936
Steve_American wrote:I'm not an economist, but my MMT experts tell me that the BoJ, the ECB, the RBA(Aust.), and the US Fed. Res. *all* have inflation targets of around 2%. If "conventional conservative economists believe the people would be better off with a little bit of deflation", then they have not convinced the leaders of those 4 key central banks.

You are very much correct here. The "mainstream" economic school of thought, which is dominant in academics and government does not agree with the "conventional conservative" economic view that I am advocating here.

Steve_American wrote:Therefore, I conclude that [most] "conventional conservative economists believe the people would be better off with a little bit of deflation" is just not a true statement.

That would be the fallacy of Argumentum ad populum.
Just because the majority of experts in a particular field agree with a particular view or belief, and just because those with this belief dominate positions of influence, does not automatically mean their belief is the true or correct one.

There are still many economists out there who hold a differing view.


I think most all of us can agree that high levels of deflation can be economically damaging. But when it comes to a question like whether just a little bit of inflation is inherently better than just a little bit of deflation, I think that's something where there will be more disagreement.
#15144997
Puffer Fish wrote:You are very much correct here. The "mainstream" economic school of thought, which is dominant in academics and government does not agree with the "conventional conservative" economic view that I am advocating here.

That would be the fallacy of Argumentum ad populum.
Just because the majority of experts in a particular field agree with a particular view or belief, and just because those with this belief dominate positions of influence, does not automatically mean their belief is the true or correct one.

There are still many economists out there who hold a differing view.

I think most all of us can agree that high levels of deflation can be economically damaging. But when it comes to a question like whether just a little bit of inflation is inherently better than just a little bit of deflation, I think that's something where there will be more disagreement.

I can certanly agree with the sentence I highlighted.
You and I, apparently, just disagree on which group of non-mainstream economists are right. Or, maybe I should say, more right, because economics is not an exact science. It is at best a Social Science, like history.

I would claim, however, that when it comes to sciences with old and new theories, the new theories are far more likely to be right than the very old theories. The very old theories were replaced by the less old theories for a reason. This reason was not always a good reason. For example, IMHO, original Keynesianism was better than either Neo-Keynesianism or Neo-liberalism.
. . . However, also IMHO, MMT is the newest economic theory and so is likely the best economic theory out there now. MMT had the benefit of more evidence to evaluate in its formation and uses the newest economic history as examples of what it got right. This why I call on all the lurkers to investigate it.
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#15145067
Steve_American wrote:I can certanly agree with the sentence I highlighted.
You and I, apparently, just disagree on which group of non-mainstream economists are right. Or, maybe I should say, more right, because economics is not an exact science. It is at best a Social Science, like history.

I would claim, however, that when it comes to sciences with old and new theories, the new theories are far more likely to be right than the very old theories. The very old theories were replaced by the less old theories for a reason. This reason was not always a good reason. For example, IMHO, original Keynesianism was better than either Neo-Keynesianism or Neo-liberalism.
. . . However, also IMHO, MMT is the newest economic theory and so is likely the best economic theory out there now. MMT had the benefit of more evidence to evaluate in its formation and uses the newest economic history as examples of what it got right. This why I call on all the lurkers to investigate it.
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Okay, I am open to new ideas. But I just can't seem to be able to understand the logic behind the MMT theory.
I'll admit that I could be wrong, but I have read a fair amount of writing/explanation about it, and I have not found any of it to be substantiative.

From what I can see, it seems to rely on piecemeal logic, not being able to properly put together the whole picture in perspective.

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