19
May
2011
Can Government Finances Be Compared to a Household’s?
I think so, in some respects:
Politicians often try to empathize with struggling Americans by promising to cut government spending, “just like regular households in tough times.” This simile evokes different reactions depending on one’s economic views. Keynesians think it’s reckless, proponents of Modern Monetary Theory (MMT) think it’s absurd, and Rothbardians think it’s correct as far as it goes, but it falsely equates tax revenues to an honest living.
A government can be compared to a household that only accepts to be paid with its own IOUs and if you refuse to can lock you up in the basement.
A government can be compared to a household that only accepts to be paid with its own IOUs and if you refuse to can lock you up in the basement.
The funny thing is, this is exactly the sort of statement a plum line Austrian would make.
Only a plum line Austrian who understands the operational reality as described by MMT.
You mean a government that has monopoly control over the production of money.
No, only of its own IOUs. You have the monopoly of your own IOUs.
You have the monopoly of your own IOUs.
The contracts of which the government will enforce by using its own IOUs as final “legal” payment, which means our monopoly IOUs become used less often than the government’s IOUs, which means the government’s IOUs are “money.”
And if you actually trade them, the government locks you up in *its* basement and calls you an “economic terrorist” for competing with its IOUs.
For a group that claims to have the best understanding of how modern monetary policies *really* work, you MMTers seem to ignore the extra “encouragement” the government gives to people to switch to its currency.
Yeah, what Silas said. I even just wrote an article on this. I could probably get a lot more people to use “Bob Murphy IOUs” if I took away everybody’s Federal Reserve Notes (I would give them the current market exchange rate, of course–I’m no thief!) at gunpoint and made it illegal to even write contracts couched in US dollars.
The word “dollar” literally means one ounce of silver struck into a coin, but if you go and strike one ounce of silver into a coin, and you call it a “dollar”, you will be in a lot of trouble for that.
“Indeed, Calvin Coolidge ran a surplus every year of his presidency.”
Which helped cause the depression.
Now that’s just lazy.
How did Calvin Cooldige running budget surpluses help cause the depression?
I thought MMT only applied in non-gold standard monetary systems.
The sectoral balances apply to every system. So a government surplus equals a private sector deficit in gold as well.
What exactly then makes Modern Monetary Theory… modern? When Murphy and others are accused of being stuck in gold standard thinking, why does it matter if they are since apparently MMT also applies in when the US was in a non-modern gold standard?
What is modern is that it applies to contemporary monetary systems.
The sectoral balances are a fact in any monetary system. So they are part of MMT but should be part of any theory that applies to a monetary economy.
Sectoral imbalances are a core foundation of Austrian business cycle theory.
>So a government surplus equals a private sector deficit in gold as well.
Which makes the remaining gold in private accounts more valuable in exchange.
MamMoTh, not being a wiseguy, genuinely trying to parse your worldview:
Had Mosler been around in 1925, he might have warned Coolidge that his policies were causing the private sector to lose net financial assets every year, right? But then Coolidge could have said, “I know, I know, but it’s that darned gold standard. It’s a straitjacket!”
Right?
The straitjacket just forced him to run a balanced budget or to borrow in order to deficit spend, not to run a surplus.
Mammoth wrote:
The straitjacket just forced him to run a balanced budget or to borrow in order to deficit spend, not to run a surplus.
Wait a second, I think you have lost the ability to think like a household. 🙂 If you don’t have access to a printing press, then carrying a massive debt means you have to use your income (tax receipts) to pay interest instead of other goodies. Coolidge was sitting on a humongous debt from World War I. So he way paying it down, just like any household would start paying down the biggest expense it had had in its history.
Come to think of it Mammoth, how the heck is paying down a government debt unsustainable? I could understand if the government started accumulating net assets, but in this case, Coolidge was just unwinding some of the huge debt that had built up during the US’s participation in the war to end all wars. So why would that cause a depression? Wouldn’t that just be moving the incredibly wealthy (flush with net assets) private sector toward the position it was in, circa 1914 or whatever?
And same thing with your theory about Bill Clinton: Didn’t George HW Bush juice up the private sector with net assets, which Clinton then took back? Why would that cause a massive recession?
Suppose instead of HW’s deficits and Clinton’s surpluses, there had just been a balanced budget the whole time. Would that have caused the dot-com crash too?
This has nothing to do with the straitjacket.
The private sector was losing net financial assets in the process.
If you have 100X and are owed 50X, if you are taxed 50X in order to be paid 50X you end up worse off.
I hope you can see from my example how running a surplus to repay the debt, and defaulting on the debt, is the same in aggregate.
Mammoth wrote:
I hope you can see from my example how running a surplus to repay the debt, and defaulting on the debt, is the same in aggregate.
Yes I do see that; it’s why I don’t think it makes sense to call government bonds “net assets to the private sector” in the first place. You yourself seem to be admitting that the only way the private sector gets paid on its “net assets” is through something equivalent to default.
You haven’t answered my question though: If we start the analysis at 1923, I understand the sense in which you are saying the private sector loses net assets every year because of the surplus.
But, even if I buy that, I don’t see why that should have caused the Great Depression. Because from 1914-1920 (I’d need to double-check to see exactly when US started ramping up war spending), the US gov’t ran massive deficits and so pumped “net assets” into the private sector.
As of 1929, the private sector had more “net assets” in your view than it did in 1914. I.e. the government debt was higher in 1929 than in 1914.
So my question: If the US government had just run a balanced budget from 1914 through 1929, would there still have been a Great Depression?
If not, it’s a bit weird then. You are saying the government caused a Depression by (on average) giving the private sector more assets over the 1914-1929 period.
MMT people call bonds net assets because they consider them an interest bearing savings account, pretty much as liquid as reserves, and whose only function is to support the interest rate set by the Fed.
About the link between surpluses and recessions I am no expert. Rodger Malcolm Mitchell had an interesting graph showing how long debt reduction periods were followed by recessions or depressions, but I don’t have the link.
In general, and in particular in the 90s, what matters is the 3 sectoral balances:
Net Private Savings = Government Deficit + External Balance.
So with a deficit in the external balance, even a budget deficit, if too small, will mean the domestic private sector is in deficit.
Coolidge was President during the roaring 20s.
The Depression occurred under Hoover and FDRs watch, who increased government spending by record amounts.
FDR’s spending helped cause the Great Depression.
FDR’s spending helped cause the Great Depression.
FDR’s spending was so bad, it defied the laws of time and space!
He funded tachyons.
Remember the first two rules of existence in the universe:
1. Savings are impossible without government debt; and
2. Government surplus CAUSES depressions.
What could possibly be more obvious as you are walking down the street?
And as I was walking down the street, I was thinking that without taxation, there would be no surplus, and thus no depression. Rothbard wins again.
Roddis, you are thick as an attorney!
The are the rules of the monetary universe:
1) A monetarily sovereign country does not need to issue debt in order to spend. If it decides to do so, it can set the interest rate at whatever level it wants.
2) S-I = G-T + X-M is a fact, so are the following rules
3) Net savings of the private sector equals to the penny the government deficit
4) The domestic private sector can net save if the government budget is in smaller than the external surplus.
5) If the domestic sector is in deficit, that is spending more than its income, for the GDP to grow it must sell off assets or increase its indebtedness
6) An increased level of indebtedness of the domestic private sector is likely to be unsustainable and eventually lead to a recession
7) During a recession lowering taxes can restore the level of aggregate demand
8) It’s better you walk down the street than you squander stolen gas to give meaning to your life.
A government cannot create something out of nothing, nor for that matter can a household. The laws of thermodynamics apply at all times (or at least that is to say, neither individual nor government nor household has found a way to escape these laws yet).
There’s another thing governments are unable to do — they are unable to force people to trust. You can force people to give something of an outward appearance of trust, but their behaviour depends on actual trust, not appearances. As Stalin discovered, the harder you whip people to make them into good hardworking servants of the state, the more deeply entrenched becomes the lack of motivation and depth of corruption.