…is up at Mises.org. An excerpt:
According to many proponents of MMT, “deficits don’t matter” when a sovereign government can issue its own fiat currency, and all the hand wringing over the government’s solvency is absurd. In fact, the MMTers claim that given the reality of a US trade deficit, a sharp drop in the government’s budget deficit would hamper the private sector’s ability to save. Thus, the Austrians are unwittingly calling for a collapse in private saving when they foolishly demand government austerity.
Thus far I have accepted the MMT premises on their own terms, and shown that MMT’s proponents often read more into their neutral accounting relationships than is justified by the relationships per se. However, in this final section I want to point out something even subtler.
One way to describe MMT is that is a “nominal” model of the economy, looking at flows of money without inquiring too deeply about the economic significance behind the flows. This article is already lengthy, so let me illustrate the problem with an analogy.
Suppose Tabitha has an income of $100,000, out of which she consumes $90,000. Tabitha takes her savings of $10,000 and lends it at 5 percent interest to Sam, who signs over an IOU promising to pay Tabitha $10,500 in 12 months.
Now let’s stop and ask, did Tabitha save money in this scenario? Yes, of course she did. Another question: did Tabitha accumulate net financial assets? Yes, of course she did: she is holding a legally binding IOU from Sam, which possesses a current market value of $10,000 and will grow in value over time as the payoff date approaches. (Changes in Sam’s solvency and interest rates of course might inflict capital gains or losses along the way.)
Now let’s tweak the scenario. Suppose I tell you that Sam plans to raise the money needed to repay his loan by selling services to Tabitha. For example, suppose Sam used the $10,000 loan to buy equipment that he will then use to perform landscaping work on Tabitha’s property over the course of a year. Every month Tabitha pays Sam a fee for his services, and after the 12th month Sam takes these fees, which are equal to $10,500, and hands them back to Tabitha.
In this revised scenario, is it still true that Tabitha acquired a net financial asset when she bought the $10,000 IOU from Sam in the beginning? Yes, of course it is. Tabitha voluntarily purchases the landscaping services from Sam; the flow of money back and forth is a bookkeeping convenience. Economically, what happened is that Tabitha exchanged a stock of present goods up front for a stream of services over the course of the year.
Now let’s tweak the scenario one last time: Suppose that Tabitha lends $10,000 to Sam, who gives her an IOU promising $10,500 in 12 months. After the year passes, Sam walks up to Tabitha and sticks a gun in her belly, demanding $10,500 in cash. She hands it over to him, and then he gives it right back and tears up his IOU.
In this scenario, did Tabitha acquire a net financial asset when she originally lent the money to Sam? No, not really — especially if she knew how he planned on “repaying” her. In this case, Tabitha’s savings of $10,000 would have simply been confiscated by Sam. He can go through the farce of giving her an IOU and then robbing her in the future to “redeem” it, but economically that is equivalent to him simply robbing her of the $10,000 upfront. From Tabitha’s viewpoint, her $10,000 in savings vanished, while Sam’s consumption can rise by $10,000 without increasing his own indebtedness.
Now let’s expand the groups. Instead of the individual Tabitha, consider the group of all Taxpayers. And instead of the individual thief Sam, consider the institution Uncle Sam. The MMTers correctly tell us that the Taxpayers can’t accumulate “net financial assets” — i.e., drawing on income streams that originate outside the group — unless Uncle Sam runs deficits and issues them bonds.
But what is the point of accumulating bonds that will only be redeemed when Uncle Sam coercively raises the necessary funds from the same group of Taxpayers in the future? Any individual taxpayer can justifiably look at a Treasury bond as a net asset, because his or her own tax contributions will not vary significantly based on his or her investment decisions regarding Treasuries. But the private sector as a whole surely shouldn’t naively assume that if the government runs a $1.6 trillion deficit this year, this foretells of a shower of new income flowing “into the private sector” down the road.
Paging James Galbraith, is your Google Alert activated? I’d be interested in your thoughts…