By Michael Hoexter
The hour is late and politicians on both sides of the Atlantic are attempting to shrink the social welfare state in the name of a lack of funds. Barack Obama has made it now abundantly clear that he is no friend to Medicare, Medicaid and Social Security, after years of signaling overtly and covertly that cutting social programs was his intention. Obama is as beholden as any right-wing politician, a group among which some might count him, to the notion that the government is running out of money, as if our money was still backed by a limited supply of gold bullion. According to Obama and his fiscal advisors, the government’s supposedly limited funds must be conserved by cutting the activities of government while also raising taxes to, in the “hard-money” telling of the story, “increase revenue” from the private sector for the remaining government programs. The former activity of cutting social welfare spending seems in Washington DC to take political precedence over the latter, in part because the wealthy in the private sector are a powerful lobby for their monetary holdings and income. Meanwhile the poor and middle class have not been, over the past 40 years, a powerful lobby for the social safety net which puts a “floor” under their standards of living.
The only economic school that has a plausible account of fiat-currency issuing governments’ monetary role in the economy and the flow of funds between the three main sectors of the economy, the Modern Money (MMT) school, has discovered that in fact government deficits are absolutely necessary for economic growth and they represent no strain on a monetarily sovereign government issuing a non-convertible floating currency, like the US, UK, Canadian, Australian, and Japanese national governments. In the era of fiat currencies, these governments cannot run out of their currency which they create via spending on goods and services available for sale in that currency. These governments with their central banks are the source of the US dollar, pound sterling, Canadian dollar, Australian dollar and yen, respectively without the intermediation of bond markets. Even in the era of the gold standard, a similar principle applied as government spending over taxes collected grew in order for economies to grow, limited by the availability of the element Au in metallic form, the supply of which grew in the “golden age” of the gold standard.
Monetary sovereign governments’ ability to create and spend their own currencies’ in any amount has a role in enabling economic growth to occur at all. A necessary though not sufficient component of economic growth is a net growth in the supply of money in circulation or in savings. Bank and other private sector-to-private sector loans have no net effect in the growth of money, even though they temporarily create money that is circulated in the economy before its repayment; bank lending is not the reuse of other people’s money but the creation of new money in the hope of making a profit in the form of interest. The repayment of the loan zeroes out the loan principle leaving only the sum of interest payments which, in aggregate across the entire economy, come from another source, ultimately government deficit spending. Through loan creation, banks can temporarily create money but not “mint” it.
Tax collections by a national currency-issuing government effectively destroy money/demand in the private sector, though local and regional governments, which do not issue their own currencies, use taxes as revenues to pay for expenses. Therefore, the only consistent source of overall growth in the monetary economy and in overall monetary wealth is the net “excess” spending of currency issuing national governments, the surplus of spending over federal taxes collected. To count as economic growth, the overall increase in monetary holdings must be accompanied by the creation of real goods and services but this observation does not alter or diminish the role of government spending above taxes collected, i.e. government deficits. Apologists for the ideal of a purely or largely private economy attempt to split off government’s role from the functioning of the economy, leaving in the minds of policy makers and the public the ideologically “desirable” but false image of a self-sufficient private sector.
Though it has theoretical and empirical justification for its attitude toward deficits, unlike other economic schools in this regard, the Modern Money school stands practically alone in its assertion that budget deficits are almost de facto desirable, if the goal of economic activity is considered to be economic growth,. To be consistent, if one, as a policymaker, citizen, or economist, endorses economic growth in a capitalist (monetary) economy, one must be “for” almost permanent government budget deficits of varying amounts. Because of a number of ideological factors, economic and political actors are either unaware of this fact or choose to run away from it. Austerity advocates/deficit hawks are in full flight away from economic policies that would result in economic growth even as they claim otherwise.
A few nations with large trade surpluses (unlike the US), which of necessity cannot be the majority of nations, can also experience economic growth without budget deficits, but this is not necessarily an economically virtuous condition. Running a large trade surplus requires other nations to run equally large trade deficits in net, and a willingness to therefore “finance” the trade surplus generating country by buying its output. Overall, for the world economy to grow, in aggregate the governments of the world must spend more than they tax, injecting more money into the world’s economies to represent in monetary terms the growing sum of real goods and services that have been bought and sold within and between nations. Net growth in the number of currency “markers” available for economic actors to account for their gains and losses in the economy must come from a net growth in government spending of the world’s various currencies.
Terminological Imprecision and Cognitive Dissonance
From the MMT account of monetarily sovereign government budget deficits, one can conclude that budget deficits are for the most part a critical, positive driving force in the world economy, at least if one endorses the idea, as is the common assumption of many, that economic growth is a good thing. However, the way the concept of “deficit” is handled by the rest of the economic profession, by the media and by the public, one gets exactly the opposition impression: “deficits” are to be avoided or, alternatively, temporarily indulged in only to be expunged later on. The former position can be stylized as the “deficit hawk” position while the latter is the “deficit dove” position to which left Neo-Keynesian economists like Paul Krugman and Robert Reich adhere. None of these actors would say that economic growth is “to be avoided” or “temporarily indulged in” even though this would be essentially a restatement of the same position.
MMT economists and writers have explained that the word “deficit” means something different when applied to a currency issuing government but these explanations have I believe tended to fail to make significant headway in the public sphere. Most often MMT economists draw a distinction between governments and households. In MMT treatments of this issue usually there is the explanation that of the three major sectors of each national economy (private sector, public sector, and “rest of the world”), the public sector is the only one that can remain untroubled by any given amount of “deficits”. Furthermore, in some public efforts to build bridges with “deficit doves”, I’ve noticed that sometimes the difference between the MMT position and that of those who abhor or just “tolerate” deficits” starts to be washed away. In the wish to create a united front with those economists who recognize the horror of the austerity drive, MMT’s contribution to our understanding of money and the macro-economy is lost.
The problem is that both in denotation and connotation the word “deficit” is not up to the job to describe the concepts it is supposed to describe as called upon by Modern Money Theory. The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. But currency-issuing governments don’t take in income in their own currency. “Deficit” can apply to the spending gaps of local governments and the Euro-Zone governments that cannot create their own currencies but a government that creates its own currency can never be in “deficit” within its own currency. Conventional accounting applies to “currency users” but not currency issuers. I have made the case elsewhere that we need to formulate a “macroeconomic accounting” or an “open systems” accounting methodology to understand and guide the workings of a currency-issuing government.
If the same word “deficit” is used to describe the very different accounting operations of currency users and currency issuers, too much of the “negative capabilities” of the listener/reader are required to keep separate the kind of deficit that a currency user runs (a real deficit) versus the spending output of the currency issuer over taxes collected. If the word “deficit” is used for the latter, many additional cognitive operations are required to remind oneself that this deficit is not one that requires intake of more funds from outside the government (i.e. taxes) to fill. While MMT economists have worked for years with these assumptions attached to the word “deficit”, it cannot be expected that those coming from the outside of the MMT community will be able to apply the entire MMT framework to “keep” the denotation of the word “deficit” separately.
Connotatively the picture is even clearer: deficit sounds “bad” and evokes fears of holes and things that are missing or lacking. MMT economists do not conceive of deficit spending as in fact a hole nor should it be viewed with trepidation or disgust. The connotative problem also points to political problems in continuing the use of the word “deficit” as applied to monetarily sovereign government accounting.
A Proposed Alternative: Government’s “Net Contribution”
Instead of a “deficit”, I would submit that the excess of spending over taxes collected represents the government’s “net contribution” to the economy. One can either expand or contract this phrase depending on the needs of the situation: it could be made more explicit by expanding it to “the government’s net monetary contribution to the growth of the economy” or shorten it to “the contribution”. “Contribution” denotes the adding of something without necessarily the subtracting of something else from someone else. The connotations would seem to apply much more accurately for work of the currency issuer in the “production” of additional monetary units. I think that it needs the word “net” for precision because spending below or at the level of taxes collected also is part of government’s “contribution” to the economy. Taxation would be the “removal of demand” from the economy by the currency issuer.
“Net contribution” also encourages us to look qualitatively at how and where government is spending and active in the economy not just to look at government spending as an amount in a ledger. Potentially the government could “contribute” to the economy in a way or at points within the economy that distorts it or undermines the public purpose as broadly defined. It could also “contribute” too much making private initiative less viable in areas where this is not desirable or spend in a way that inflated the value of critical goods and services.
Additionally, in connotation, “net contribution” is much, much more positive than “deficit” both in the sense of a positive evaluation as well as positive in terms of “something observable, present, existent”. The positive connotations and the more accurate denotations of the new term would, if usage was widespread enough would start to outweigh the inaccuracies and negatives associated with “deficit” and “deficit spending”. From my understanding of how economies work, that they are mixed economies in almost every modern case, the positive connotations of the word “net contribution” are completely warranted. Again, the negative potential of the possibility for excessive government spending is not banished or suppressed by using the term “net contribution” but it does allow for the critical role of government within the broader matrix of the mixed economy.
Not Simply a Re-Framing
Lately at New Economic Perspectives there has been discussion of framing and memes to help MMT ideas gain a wider diffusion. I would submit that this re-naming is not simply a re-framing, though it does introduce a more positive frame to discuss government spending and the excess spending of government over taxes collected. The use of this new term opens up new perspectives on how to view the accounting process of monetarily sovereign governments and also allows more precise explanations of the mechanisms of economic growth. The introduction of this term makes a distinction where previously there was not one (deficit spending by sovereigns versus deficit spending by currency issuers) and therefore represents a terminological advance. It is therefore both a change in terminology and a noticeable change in the conceptual framework, to which those terms refer .
While I believe what I am proposing here will lead to better social science in terms of more accurate descriptions of economic, political and social events, I also want to see real economic solutions proposed in political debates, which currently are conducted using largely false assumptions about economics and how to improve overall social welfare. With a new appreciation of what the excess spending of government does, there now exists the potential to overturn the entire premises of the political debate, a debate which in both Europe and North America is leading governments astray. With both better understanding and better arguments, based on a terminology that is no longer mired in misleading assumptions, I believe we stand a better chance of changing the terms of the debate, whether from within the halls of power or from without.