Deficits and Debt are probably the most terrifying topic that MMT addresses. We need to be careful. We are treading on moral (or religious) grounds. We know that one should not be a debtor (or, a creditor)—most religions tell us so. One who proclaims that deficits and debts are OK is automatically engaged in blasphemy of various sorts, not least of which is a crime against morality. Let’s try to frame the discussion.
When government spends more than it taxes, we not only get the services and infrastructure that we need but we also get to accumulate net financial wealth. We are richer in both real terms and financial terms. Government also offers to pay us interest on that financial wealth if we prefer to hold treasuries rather than HPM.
Government spending greater than taxing should not be called a “deficit”, rather, it is government’s contribution to our saving; government bonds are not “debt”, they are our net financial wealth.
Deficits and debts are bad framing; saving and wealth are good framing.
The clock that used to sit in Times Square doesn’t record our national government’s debt, rather, it shows our net financial wealth. President Obama has added trillions and trillions to our financial wealth, making up for some of the losses Wall Street imposed on us. Thanks Uncle Sam!
Of course, as discussed earlier, government can spend too much—even if it balances its budget. It might not leave sufficient resources to promote the private purpose. It might cause inflation and currency depreciation.
But there is no automatic causal sequence running directly from a budget deficit to inflation. Indeed, to a large extent the government’s ex post budgetary outcome is not discretionary as it depends on the nongovernment sector’s actions.
At the aggregate level, a government deficit is offset by (and identically equal to) a nongovernment surplus; and a government surplus is offset by a nongovernment deficit. The government’s budget can “balance” (spending equals taxes) only if the nongovernment sector’s budget “balances” (spending equals income).
The nongovernment sector’s balance is complexly determined (and indeed depends partly on the government’s actions) but we can take it as at least somewhat discretionary. To the extent that the nongovernment sector (which includes the domestic private sector plus the “rest of world” that includes both foreign governments and private sectors) exercises discretion over its budget it means the government’s budgetary outcome is not discretionary.
Let me repeat that: if we believe that the nongovernment sector has discretion over its budgetary outcome, then we believe the government does not have discretion over its deficit.
The government and nongovernment are thus inextricably bound in an inescapable balance. It makes no sense to talk about a government deficit as either imbalanced or unsustainable.
A government deficit will result if the nongovernment sector has a surplus—a perfect balance—and can persist as long as the nongovernment sector wills it to be so—a perfectly sustainable balance. Balances balance! Of course they do.
Balances balance. A meme that bears repeating.
Calls to cut the government’s debt are, equivalently by identity, calls to cut our net financial wealth.
Fiscal Austerians are, by definition, wealth destroyers. And they are not just any wealth destroyers: they destroy the safest and most liquid kind of wealth we can hold—government IOUs.
We like it when the government owes us. Why on earth do the Austerians want to turn the tables, reducing the number of “Government-Owes-Me’s”?; would they be happier if we all owed the government? Holding a Government-Owes-Me is like holding a “Get out of Jail Free” card—if worse comes to worst, I can pay my taxes or other bills and stay out of jail.
Deficit cutters are profit destroyers, too. As we know, government deficits mean nongovernment surpluses. For Households and for Firms. In the case of firms, that is gross profits (receipts less spending). (We could get into the Kalecki profits equation, but we shall hold off on technical details.) Cutting deficits means cutting profits.
Deficit hawks are profit destroyers. They are the worst enemies to the capitalist system. They would destroy it but have nothing with which to replace it.
At least the Bolsheviks had an alternative!
MMT recognizes the important role that government plays in protecting profits. Budget deficits mean private profits.
What’s wrong with that?