Why is it not good to use rules that apply to persons when thinking about how the Gov. should act? - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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#14866615
@SolarCross asked this in another thread and I'll try to answer him here.

Some schools of economics say that the Gov. is not at all like a person [= human or corp.] so the Gov. should not act like a person; other schools will claim that they are the same so the Gov. should act like a person.

I am not an economist and it has been a while since I read what MMT had to say on the subject, so I might get some points wrong. I also add some of my own creation.

The Gov. is not like a person because they [Gov. vs persons] are different in several very important ways.

1] People die and Gov. *can* live forever.
. . a] When Gov. do end the creditors often lose their principal. But this may not be for hundreds of years.
. . b] When people die the next generation usually is raised and can go on on its own.
. . c] Persons amass assets, these can be liquidated to pay off the dead's loans. The Gov. doesn't amass assets and liquidating what it has at some point would be stupid.
. . d]
2] Persons get income by working *outside* the family (or corp.) unit. Transactions inside the family unit don't count as income or expenditures. OTOH, the Gov. gets its income by taxing [i.e. taking] money from persons *inside* the nation [here I'm equating the family to the nation].
. . a] The US Gov. gets little if any income [taxes, fees, etc.] from other govs. or persons outside the nation.
. . b] *All* of a family's expenditures are made *outside* the family unit; most the the Gov.'s expenditures are made *inside* the nation.
. . c] So, when a person borrows from an outsider and spends the money outside the family, the family now has a thing which is not as valuable as what was spent for it or the family has nothing (if it ate food or went on vacation); the cash spent is still cash somewhere. OTOH, when the Gov. borrows money from an American and spends it inside the nation, it is totally different from what the person did. The lender still has an asset equal in value to the loan [the bond or T-bill] and the person who got the cash also now has the cash.
. . d] When a person spends money the money leaves the family unit, then the Gov. spends money it mostly stays inside the nation. When a person borrows money it must borrow from an outsider this brings money into the family unit, when the US Gov. borrows it usually borrows from an American or US Corp., so this doesn't bring money into the nation.
3] All persons [even the largest corps.] are nowhere near as big and don't have near the impact on the economy that the US Gov. does.
4] A person earns income by making transactions with other outside persons, OTOH the Gov. gets its income mostly from taxes which it just takes from persons [people and corps.] inside the nation.
. . a] I have no objection to this taking. It is how govs. have always gotten money to spend. In the Bible, King David uses taxes to pay for stuff. Under feudalism the King usually got a lot of money from the land that he owned. Under Capitalism the Gov. should not own the means of production to earn money to aviod the need for taxes.
. . b] Compare what happens with the Gov. borrowing money to spend or the Gov. taking money to spend. When the Gov. borrows the lender still has an asset, the bond or T-bill. He can sell it to get cash at any time. There is plenty of cash around so any bond holder can always sell his bond for what it is really worth.
. . When the Gov. takes money with taxes, the taxpayer gets nothing in return, except for his part of the value of the benefit for what the Gov. spends its money on [everything it spends money on].
. . When a person *earns* income both parties to the transaction get some value directly from the transaction.
. . Taking (= taxing) is quite different from *earning* because the taxpayer gets nothing *directly* from the transaction.
5] The Gov. is not a person. It should have no will of its own. It should be ruled by the people. I should be a "Gov. of the people, by the people and for the people."

In all these ways the US Gov. is different from persons in economically *important* ways and this is why advice that is good for a person is not good for the Gov. and vice versa.

Some schools of economics see this. Other schools say they don't see it, but they seem to me to be creatures of the rich to and say what is good for the rich to the detriment of the mass of the people.
#14866622
MMT is neither as new nor as radical as many people think. It basically derives from chartalism and the functional finance of Abba Lerner.

Image
The distinction our friend Alan is making is between the currency-issuer (government) and the currency-user (you). This particular distinction is what distinguishes a household budget from a government budget. The currency-issuer's spending is not limited by any financial constraint. It is limited by real-world limitations in the productive economy, such as industrial capacity and availability of trained workers.

If you begin to run up against the real-world limitations, it will be reflected in increased inflation. If, on the other hand, you have an environment of excess capacity and a slack labor market, then government can keep on spending.

In any event, deficits are an irrelevant by-product, and should not be the object of policy considerations.
#14866665
Currency issuers aren't usually governments though, ie: the federal reserve is an NGO. The prez of america can't just tell the FR to print him up some more dollars for him to spend. The FR lends money directly to commercial banks who in turn lend it to non-banking businesses and people. The gov doesn't get its hands on any currency until after businesses and people have spent it where some is then tithed off as taxes.

-------

I'll add there is nothing magical about issuing currency anyone can do it, though most don't bother.

- Brixton pound
- Bitcoin
- LETS
- Supermarket coupons

It isn't the get-rich-quick scheme you think it is.

-------

I'll also add that the US gov does not borrow from the currency issuer the FR! It borrows from anyone with any cash who wants to make a buck off of uncle sam. Most lenders to the US are US private citizens, including pension funds and other financial businesses. The rest of the US debt is owned by foreign interests including some governments.
#14866848
Solatross.
You are missing the point.
Yes, you are right that currently the Fed.Res. BK is "independent". The Prof.'s article that I read said that it is easy for the Congress to change that. All it has to do is pass a law. Also, a Pro. said that a majority of the Director of the Fed. are appointed by the US Pres. So, how independent is it rally?

MMT does ignore the point that the Fed. is independent. I know that.

MMT would point out that you are ignoring the fact that the US is 1 law away from changing that.
And give a choice between defaulting on the debt or spending dollars without borrowing them 1st; it is easy to see that default is a massively worse idea.

Also, currently IIRC the Fed. is buying Bonds and T-bills. This means that it is a fiction that the US Treasury never borrows from the Fed.
All it takes is for the Gov. to form one Corp.with $1B in cash in the bank. Then it can buy a Bond each day and sell it to the Fed. the same day for cash. Then the next day it has its $1B back and does the same again day after day.
#14866881
Steve_American wrote:Solatross.
You are missing the point.
Yes, you are right that currently the Fed.Res. BK is "independent". The Prof.'s article that I read said that it is easy for the Congress to change that. All it has to do is pass a law. Also, a Pro. said that a majority of the Director of the Fed. are appointed by the US Pres. So, how independent is it rally?

MMT does ignore the point that the Fed. is independent. I know that.

MMT would point out that you are ignoring the fact that the US is 1 law away from changing that.
And give a choice between defaulting on the debt or spending dollars without borrowing them 1st; it is easy to see that default is a massively worse idea.

Also, currently IIRC the Fed. is buying Bonds and T-bills. This means that it is a fiction that the US Treasury never borrows from the Fed.
All it takes is for the Gov. to form one Corp.with $1B in cash in the bank. Then it can buy a Bond each day and sell it to the Fed. the same day for cash. Then the next day it has its $1B back and does the same again day after day.


Congress is also only one law away from forcing everyone male and female, muslim and non-muslim from wearing a burkha in public. That does not mean anyone will do it. The separation of the Fed is exactly to prevent runaway spending sprees by gov spending new money it printed up for just that purpose because that is what causes runaway inflation ala Weimar republic, mugabe's zimbabwe and Lenin's USSR. Yes the US gov could send the po-po round to hijack the money printing machines and then set them for full turbo boost right into their own pockets but the consequence will be total monetary collapse.

Dollars are worthless, as all fiat currencies are, the only thing that keeps alive the make-believe in their value is if inflation is not too noticeable on a day-to-day basis.
#14866901
The counter examples you gave are not relevant. Yes, the Gov. should definitely NOT go hog wild. Germany was forced to do that by their NEED to buy gold to pay the reparations. Zimbabwe couldn't collect taxes and was a new nation with no history to guide it.

Otherwise your reply comes from your Neo-liberal stance, typical gold standard thinking.

MMT says that it is taxes that give dollars their value. Don't ever forget that. You and I will never agree because we have different economic assumptions.

Are you [like the man said] a useful idiot for the rich? Really? I'm very new here so I don't know anyone that well.
However, you got on my bad side when you assumed in you hypothetical that I am a lowly shelf-stocker in a super market. Thanks for the insult. Not.
#14866912
Steve_American wrote:The counter examples you gave are not relevant. Yes, the Gov. should definitely NOT go hog wild. Germany was forced to do that by their NEED to buy gold to pay the reparations. Zimbabwe couldn't collect taxes and was a new nation with no history to guide it.

Are there any examples of a government running up debts and paying them off with money it printed that did not cause massive devaluation? The T in MMT is for Theory for a reason.

Steve_American wrote:Otherwise your reply comes from your Neo-liberal stance, typical gold standard thinking.

Maybe, but is it wrong and if so why?

Steve_American wrote:MMT says that it is taxes that give dollars their value. Don't ever forget that. You and I will never agree because we have different economic assumptions.

Not really dollars are subject to supply and demand pressures same as any (quasi)-commodity. Tax is a demand pressure, so it is part of the picture but not the whole picture.

Steve_American wrote:Are you [like the man said] a useful idiot for the rich? Really? I'm very new here so I don't know anyone that well.
@potemkin said that, he is a commie, talking shit is all he ever does. BTW taking financial advice from a commie is probably a bad idea, lol.

Steve_American wrote:However, you got on my bad side when you assumed in you hypothetical that I am a lowly shelf-stocker in a super market. Thanks for the insult. Not.

It wasn't an insult, there is nothing wrong with working for a living, I have done that job myself at one time. I should probably be insulted that you think such work is an insult but I have a thick skin to go with my thick head and so don't get easily insulted over nothing unlike some people. :lol:
#14867354
I think that it makes a lot of sense to compare the Gov. to the family because
families compete with other families. There is little competition going on inside the family.
OTHO, the Gov. does not compete with families. If the Gov. can be said to compete with anyone it competes with other governments.

Since competition is at the heart of economics this lack of competition is important.

I suppose some might want to compare the Gov. to corps. Again corps. compete with other corps. and individual people. I don't think it makes any sense to claim the the Gov. competes with corps. in any significant way. After all, the Gov. can crush any corp. it chooses to crush. It would not be a fair contest.
#14868795
SolarCross wrote:Currency issuers aren't usually governments though, ie: the federal reserve is an NGO. The prez of america can't just tell the FR to print him up some more dollars for him to spend. The FR lends money directly to commercial banks who in turn lend it to non-banking businesses and people. The gov doesn't get its hands on any currency until after businesses and people have spent it where some is then tithed off as taxes.

Nor need it, or there'd be no such thing as a deficit. Deficit spending by definition precedes tax receipts and therefore puts additional dollars into circulation. Subsequent receipt of taxes takes them out again. The order of operations is crucial.
#14868808
SueDeNimes,
I recently learned [see the video about MMT I linked the other day] that the Fed. Res. credits the US Gov. account with all the dollars that it decides to sell as soon as the Treasury announces the sale.

The US gets to spend the dollars before the Bonds or T-bills are sold, i.e. before the money came in.

Again, the order is important. I don't know what would happen if the Bonds were not bought. Maybe the Fed. would buy them, but I think this is currently illegal.

In any case the dollars would already have been spent. They would be in the US banking system adding to the deposits of people or corps. This would make it easier for someone to decide to buy the Bonds.

SolarCross gets this and a lot of other facts wrong. I wouldn't worry about educating him, he doesn't learn from internet forums.
#14868816
SueDeNîmes wrote:Nor need it, or there'd be no such thing as a deficit. Deficit spending by definition precedes tax receipts and therefore puts additional dollars into circulation. Subsequent receipt of taxes takes them out again. The order of operations is crucial.

Except that the deficit is made possible by loans and taxes repay the loans. The lenders are not separate from the economy so the loaned money is not necessarily newly created money and when repaid the money doesn't disappear but gets spent or invested and thus still circulates.

Ultimately it is not really a through-the-looking-glass alternate reality but just the same corporate financing as any other company: loans or sale of shares (T-bills) finance expansion and taxes in lieu of sales pay off the finance. The difference is scale and the fact that government's sales are semi-involuntary ie: taxes.
#14868828
SolarCross wrote:Except that the deficit is made possible by loans and taxes repay the loans. The lenders are not separate from the economy so the loaned money is not necessarily newly created money and when repaid the money doesn't disappear but gets spent or invested and thus still circulates.

I refer you to the comment to which you ostensibly reply. That's how a deficit is denominated, not -by definition- how it's "made possible". So long as the tax liability is outstanding, there is more money circulating in the private economy precisely because "lenders are not separate from the economy."
Ultimately it is not really a through-the-looking-glass alternate reality but just the same corporate financing as any other company: loans or sale of shares (T-bills) finance expansion and taxes in lieu of sales pay off the finance. The difference is scale and the fact that government's sales are semi-involuntary ie: taxes.

Nothingl to do with it.
Last edited by SueDeNîmes on 07 Dec 2017 13:49, edited 1 time in total.
#14868832
SueDeNîmes wrote:Like what?

The OP is hoping magical thinking will allow government to circumvent the reality that fiscal prudence matters to everyone even governments; he wishes hard to believe that governments can metaphorically float on air with nothing but a fart stream holding it up against gravity.

Thus my claim that government is NOT a magical exception, that it is in fact just a really big conglomerate of corporations with an operational emphasis in real estate, arbitration and security, and thus should engage in fiscal prudence like any other economic actor, large or small. :)
#14868842
SueDeNîmes wrote:Well that's just re-asserting your opinion to the contrary. If money creation works as posited here, you're plain wrong and presenting neither counterevidence or counterargument.


Governments are military corporations but that doesn't grant immunity to the economic consequences of profligacy. Even getting repossessed is possible..

How a Hedge Fund Repoed an Argentine Navy Ship

I wonder how many times governments have to fuck up their finances before certain dumb shits will lose the magical thinking.
#14921759
Yesterday I heard a podcast of an interview with Dr. L. Randell Wray [a leading professional MMTer].
He was asked to explain why the US Gov. is not like a family. And so why comparing it to a family leads to bad policies.
Part of his answer raised a point I had not included in the OP.
He said that the Gov. is always an aggregate. That behavior that is good for an individual often is not good if everone does it at the same time. Dr. Prof. Wray used the example of a person or persons in a crowded movie theater. The individual can easily get up and leave at any time, but if they all try to leave at the same time, none of them can leave quickly.
. . . Lord J. M. Keynes pointed out the 'paradox of thrift'; that is, if every family in an economy puts $1000 into their savings account in the same calendar quarter this cuts spending by $1000 times 250M families == $250B less spending, and this will reduce the GDP by about $250B, and this will cause a Recession. Note: all that additional money in banks does *not* increase the banks' ability to make loans by even $1 more.
. . . When the US Gov. runs a surplus, this has the same macro-economic effect of every family reducing its spending by its fraction of the total amount of the surplus and the Gov. not increasing its spending to offset this. [I hope that is clear. Take the total amount of the surplus and divide by the number of families reducing their spending to get each family's share of the surplus.] This is true because every dollar of Gov. spending adds $1 or more [if it's re-spent] to the GDP. Gov. spending is included in the GDP and adds to the public's income and so to its spending and so increases the GDP more. Neo-Liberal economics ignores this effect, MMT does not ignore it.

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