“Deficit” is the Wrong Word and Concept

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.

 

44 Responses to “Deficit” is the Wrong Word and Concept

  1. Thornton Parker

    Michael,

    This is an outstanding contribution. We should adopt your term “net contribution” for the federal sector in our explanations because it makes sense and appeals on multiple levels. Similarly, the term “debt” needs to be replaced for the federal sector. Perhaps “total contributions” would work. I’m not sure that this renaming fits the other two sectors, but that just shows the need for us to keep thinking, as you are doing. .

    Tip Parker

    • Thank you, Tip.

      Yes, “debt” is also problematic when applied to currency issuers; technically the bonds produced because of legal requirement are debt. The fact that the are compelled only by law and not by economic necessity needs to be noted.

      • Yes, “debt” is also problematic when applied to currency issuers. Sigh, for the umpteenth time. No, it is not problematic. It is problematic and confusing to NOT apply it. Currency, reserves, greenbacks are debt. Bonds are debt. They’re the same thing. One is just the other with a different date printed on it. Whoop-de-doo. Read Mitchell-Innes. The memes necessary for the absolute, complete & eternal victory of MMT are there. The fundamental concept is credit/debt, not “money” or “currency”. Everybody is a currency issuer. The hard part is getting other people to accept the currency you issue. Uncle Sam has solved this problem. The problem is he has gone cuckoo & thinks he hasn’t.

        Above all, even more important than the particular words “debt” “credit” “liability” – the thing is to consider money as what it is – a relationship, not a thing. Which conceiving ab initio, with no deeper philosophical grounding, of the government as the magic currency issuer of a magical thing called currency is a subtle step backwards from.

        I have to say that the confusion is partly sowed by the “government budgets are not analogous to household budgets” meme. IMHO a misleading and dangerous one. Government budgets are not “analogous” or “like” household budgets. They’re exactly the same thing as household budgets. It’s just that government debt, the debt of the sovereign household has a special name. “Money”. Government debt is what we use to pay, to settle private debts. Government debt, government money isn’t different or problematic or special because we have a special name, “the government” for the issuer. It is different – a difference of degree, not kind, which becomes one “of kind” – because it is a lot bigger than you or me or even First National TBTF Bankster Bank. That real world power, real world agreement, real world social contract is what makes everyone else measure their own debts in terms of the government’s, do their accounting in terms of how much niceness Uncle Sam would owe me if I liquidated. This universal measuring, accounting in terms of is the difference-in-kind of government debt. That’s all. The difference is a behavioral difference, an expression of a “collective action in control of individual action”, not a fundamental theoretical, operational, logical difference.

        • Calgacus,
          I’m afraid, one of the weaknesses and not the triumphs, of MMT is the overexpansion of the definitions and economic technologies attached to the word “debt”. Just try to explain, to the uninitiated that the dollar that they they hold in their hands is the same thing as their student loans or a bond that they hold in an investment account. You will not get very far or you may by dint of your personal charisma or authority get nods of the head but, after you have gone, people will continue to view these things as different types of money technology with different potential uses.

          Yes, it appears that money has an aspect or origin in creditor-debtor relationships, but the overapplication of the word “debt” by MMTers is both a communication and a scientific problem. One of the confusions is that MMTers have confused ontological and functional explanations: that money originates historically as a marker for debts or even that it theoretically can be used to pay tax debt, doesn’t mean that saying that it “really” is debt explains the diversity of forms and uses that modern money instruments have.

          I think MMT can progress by encouraging critical thinking (as would any science) and therefore I regard MMT triumphalism as one of the most toxic and unhelpful things I have encountered in the MMT community. Neoclassical economics is laughable but just because MMT is better than neoclassical economics isn’t, in my book and given the stakes involved, a cause for celebration.

          • MMT should tell people that government is a bank, not a customer of a bank.

            • Brilliant ! I love comments which are original, brief and to the point.

            • “MMT should tell people that government is a bank, not a customer of a bank.”

              Better to say that government is both a bank that creates credit and a user of that credit to provide public goods and services including entitlements such as social security and as such is part of the provisioning of society with credit along with private banks. The two types of banks working together to provide National Credit. Alongside this must run the MMT explanation of the real uses of taxation and bonds to obtain demand for the currency, constrain inflation and allow government to determine the credit or money base rate.

              • Understanding that government is a bank removes the reluctance to accept that government has the right to issue a $1.2 trillion platinum coin as an expedient to rectify the ignorant blackmailing attempt of the Republican Party to hold the US economy and that of other world economies to ransom.

              • Thornton Parker

                Might we be getting off into the high weeds again? I find more people understand an explanation of good can be done with MMT than the details of how it works. Few drivers know how many computers there are in a car, much less what they do. Some people have found that comparing government spending with a car’s accelerator, taxes with its brakes, and specific government programs with its steering wheel makes sense to them. It helps them understand how misusing any of them, including pressing the accelerator too hard for too long can cause a wreck. Safe driving requires using all three correctly. Is driver’s ed a better model than conventional normal economics ed?

                • For Joe the plumber, I would say yes, this is a better analogy. It is simpler and relates to her everyday experience.

  2. what bothers me here is that that a government can nonetheless overspend isnot given its due.

  3. Excellent overview of MMT and the problem of “the deficit”. It would definitely help some of the commentators of the previous posting by Bill Black to read this carefully and try to comprehend where their understanding of MMT falls short. Thanks, Michael.

  4. Personally I prefer “Net Equity” and the distinction that private currency users and public currency issuers, but “Net Contribution” sidesteps the private context accounting of equity being something that is in principle intended to be possibly paid back and on the liability side of the balance sheet. I think that perhaps explicit standards for macro level public accounting is also needed. I can work with either variation. making this material more accessible and debunking/disarming the deficit heavy breathers will be a good step. There isn’t much that will actually stop the deficit trolls or the deficit doves still invested in the neo-classical fictions. I believe that are several categories of government expenditures that also be re-framed as bastard Keynesianism, eg subsidies, wealth fare, resource depletion allowances. Much like taxation actually being a folio of policies to control the concentration of wealth, and typically it is used against the demand side of the model in subsidy over the cost of labor and infrastructure. Even education costs that are used in majority to enhance corporate profits at both private personal and public expense. Back to the reality side of the looking glass. Extending the separation of private versus public, as in currency issuing, is there a macro economic currency issuer balance sheet, and or is this absence a partial explanation of why the notion of equilibrium is more theological than factual? Framing the 29 trillion as a prima facie example of imbalance due to insolvency seems to be appropriate.
    thanks for this.

    • Thanks for thinking along, Tadit. I think “net contribution” has a better chance of being looked at as a flow while “Net equity” or “Net Social Equity” sounds more like a stock. The sum of “net contributions” over time add to “net social equity”, if you like.

      • Clearly the gold standard era macro-economics semantics need to be amended. Steve Keen did a presentation to Washington DC staffers recently which compared historical patterns of responses to stimulus. Part of this was plotting the response to the economic stimuli, prior to, during, and post the 20th century depression, which of course showed that both that the size of the New Deal stimuli was actually weak (due to the politics of that era), and of course that the effects of that depression were “eliminated” by military expenditures as a form of bastard Keynesianism. It seems like the “net contribution” concept would help to parcel out also where the contributions go, such as into the demand side or not. Part my point is that under the current configuration military expenditures have expanded even more since WWII, and it is really not at least feasible to increase the net contribution in that direction again as even a nominal means of of addressing the 21st century Great Depression. This is about predicting net contributions to the demand side or to the supply side which as we know actually has a lesser positive effect upon the macro economic performance. Shifting toward a proportionately larger demand side net contribution seems. Keen in his metrics needed to show this as the effectiveness of the different net contributions. Subsidies to corporate returns are massively different in effect than investing in the repair and expansion of physical infrastructure as one example and to social infrastructure as both a way reducing the demand side of the costs of living. This kind of breakout would allow the examination of various fiscal policies. Military Keynesianism as a fiscal policy could be shown to have a massive upward effect upon inflation for instance in the competition for scarce resources and in the lack of actual return to the demand side. This brings to mind the actual fiscal basis of the British Empire via the British East Indies corporation as having its primary net contribution to the supply side, aka “corporate plunder.” The economic effects of the drone technology, for instance, would be similarly inflationary for the supply side return and in comparison to the demand side net contribution. I believe that your framing works fairly well in parsing out these different effects. Perhaps the demand side negative effect for instance of the Gulf of Mexico BP despoiling could be parsed out in a similar way. Subsidies such as TARP and QEx need a vocabulary as net negative contributions to the demand side, but clearly a positive to the supply. More generally the net negative of Gresham effects to the net contribution to the demand side would also have an analytic vocabulary. thanks

  5. “Deficits are desirable”? Is this seriously what passes for academic thinking today? This line of thinking is dangerously naive. While its true that our currency is not limited to the gold supply, neither is it totally limitless without any repercussions. Our currency is the de facto standard for the world today, but it may not remain that way for long, especially if we continue to intentionally weaken it. Economic history is littered with examples of what can happen to those that flood the market with their currency – eventually, the debt becomes unsustainable and has to come in line with the countries revenues and GDP, or inflation will ignite. The liberal cries that “well, it hasn’t happened yet!” are he dangerously naive part.

    I would ask the author, and anyone who subscribes to his theory, to answer his question : if deficits are “good”, and necessary for growth, then why have we had such moderate growth the last few years, even though we have had a huge amount of monetary pumping (relative to GDP)? And if some deficits are good, why not multiply them, if growth supposedly follows? And at what point, if any, do you actually intend to repay the debt? Because I would submit that it will be a future generation that eventually has to pay, most likely at a point where China and other large countries have eclipsed us as the economic superpowers, and we are not in as fortunate a position as we are today.

    • All your questions have been answered many times, at this web site and others. For a fairly compact explanation of the economic theory behind MMT, I recommend “7 Deadly Innocent Frauds” at moslereconomics.com.

    • I would second Golfer’s pointer that you look around on this website before pursuing this line of attack. Most of your questions have been answered either in this post and in many other places. You seem simply to be writing from prejudice and hackneyed economic jargon and, in my opinion, haven’t really absorbed the propositional content of what I wrote above.

      Regarding current deficits and the state of the economy now: we are currently in a debt-deflation depression where the private sector is for the most part not able to invest in consumption or investment goods. Many funds are being used to pay down debts incurred during the credit boom of the last decade (i.e. deleveraging). Steve Keen has some excellent work on his blog (debtdeflation.com) showing how private debt levels peaked in the late 2000’s leading to the crash and they are still at historically very high levels (over 300% of GDP). The deficit spending of the last few years has cushioned what would have been a 1930’s style crash. This has been discussed multiple times in a number of venues, both in the context of MMT, in post-Keynesian circles and also among New Keynesians like Krugman.

  6. The problem remains one of transmission.
    It is undoubtedly true that government spending must fill the gap when private spending and investment leave the economy unnecessarily idle.
    The wrinkle in the transmission mechanism is the logic behind the position that taxes and debt do not pay for government services, and that policy space is what MMT is all about.
    So, no problem with the deficit, but how do we pay?
    For those convinced that the government creates money when it spends NOW, the problem seems one of either intellectual capacity or some need to defend the status quo.
    But if your system of beliefs works around the reality of paying taxes to support government spending and interest on quickly growing government debt, then the significance of these deficits changes.
    So, there is one clear path to funding the deficit without issuing more debt and increased taxes and that lies in convincing open-minded people of normal intellect that taxes do not pay for government services.
    And its not that they don’t have to.
    It’s that they don’t.
    I have no idea how anyone becomes convinced of such a thing.
    But for those in the know of such a thing if you can lay out the proof of such a statement on one sheet of paper, you’re home free.
    I know there is a way to fund those balances formerly known as deficits with newly created government-issued money in a sovereign fiat money system.
    It is definitely possible.
    It’s our money system.
    What this sovereign fiat money system needs is a new transmission mechanism – from could and should to does and done.

  7. John Turner, Australia

    Jimbo,
    The government can only overspend if it attempts to buy resources that are currently already being employed efficiently in the economy. To do that tends to cause inflation.
    Most politicians and commentators either do not understand the counter cyclic role of a currency issuing government in overcoming the cyclic problems of the market economy, or they are blatantly dishonest and are attempting to mislead the public for the benefit of their own group, usually those already in positions of power and/or wealthy.
    The sovereign government, from the peak of the business cycle to the next peak, can have an increase in the accrued (total) budget deficit at least equal to the total growth of the economy over that cycle.
    It the government by its budget spending increases the newly created assets it owns on behalf of the citizens over that business cycle then the budget deficit growth can be even greater.
    Budget deficits increase economic activity, budget surpluses and austerity measures have the opposite effect.
    Privatization only makes sense if a particular business or industry is completely competitive in the Adam Smith sense. Where only one service is provided to a home my an extensive industry such as a telephone or power cable, or water and sewerage, competition is fictitious and wasteful. Modern banks do not fit Adam Smith’s specification.

  8. Why not get Baker and Krugman to participate in a panel discussion about this?

    • Both these economists have too much invested in the status quo to be drawn into this discussion in my view. They always studiously avoid mentioning that the Federal Reserve is a private bank.

  9. Government spending doesn’t “contribute” anything, it consumes real resources. The excess of spending over taxing is “Net Government Demand”. For anyone familiar with the concept of aggregate demand, this phrase is self-explanatory. Aggregate Demand (GDP) is the sum of net private demand, net government demand, and net foreign demand.

    A decrease (increase) in net government demand has the same effect as a decrease (increase) in net private demand or net foreign demand: it tends to reduce (increase) aggregate demand (GDP), and in the extreme it tends to cause recessions (booms) and high unemployment (inflation).

    As sponsor of the country’s economic system, government has the responsibility to manage Net Government Demand (and by taxing, to influence net private demand) so as to maintain full employment and price stability, as much as it can do.

    Before this new phrasing can be really useful, it is necessary for the concepts of monetary sovereignty and the sectoral balance to be understood, along with the basic truth that larger economies need more money than smaller ones, and its corollary, that a growing economy needs a constant injection of new money: a positive Net Government Demand, every year.

    Since the law has always required that Treasury securities be issued in the exact amount of Net Government Demand each year, it just so happens that the outstanding stock of Treasury Securities is the accumulated total of Net Government Demand added to the economy since the beginning of the Republic. There is no economically significant meaning for that quantity. It has none of the same characteristics or implications as household debt, for instance. It should be called Total Treasury Savings Deposits. Even though there is little physical paper involved anymore, the evidence of such a deposit should be called a CD (Certificate of Deposit) not a bond. Also, it should be noted that there is no reason that the acceptance of Savings Deposits (not “issuance of bonds”) by the Treasury should be tied to the annual Net Government Demand. They serve different purposes, and there is no reason to believe that their separate purposes would be optimally fulfilled only when the two dollar amounts are equal. That law should be repealed.

    Adoption of these terms should help with the understanding by the population of the proper sorts of economic policies that governments should pursue.

  10. Thank you, Michael! Now we’re getting somewhere! Yes, Net Contribution or more exactly “Net Annual Contribution” or simply “Annual Contribution”. And instead of National Debt, let’s say “National Contribution”.

    We should also be clear about what citizens get and got for making “Contributions”. The Treasury sent out checks in payment for goods and services resulting in the infrastructure that surrounds us and has always surrounded us (including our armed forces) throughout our history. It was not all wasteful spending.

    And, taking up Tadit Anderson’s request for a balance sheet, we need a better measure of National Contribution than percent of GDP. How much money (M2?) should be out in the economy? Does M2/GDP (now about 62%) tell us everything? (Switzerland’s ratio is twice as high.) How much of M2 consists of outstanding bank loan balances (investment) or of Treasury bonds (idle funds)? How much is actually within the reach of consumers? How will we know when Annual Contribution is too high, other than looking at unemployment rates and production capacity? We need better accounting measures.

    Unfortunately, the question of debt still remains, since Contributions will still be covered by the sale of T-bills and the payment of interest, the deficit hawks most potent weapon. We have to drop the other shoe and campaign for the Fed to buy bonds directly from the Treasury. You can’t sell one without the other.

  11. In addition the issue of the wisdom of “currency hegemony” to play the world’s policeman is neglected by MMT since playing the “world’s policeman” needs at times of war economic mobilization for which having a dominant currency is clearly a virtue just as having one currency within one nation is also for the same ultimate deterrence of internal and external threats. So currently the US Dollar is the world’s principal “net contributor” but Austerity Hawks within the United States play into the hands of Communist China who uses MMT and will clearly understand that at some stage in the future to gain world dominance they have to usurp the US dollar for their own currency. In plain and simple terms there is a “dominance hegemonic factor” in currency issuing or “contributing” that needs explication.

  12. Nice article! If only Paul Krugman would read it.

    A necessary though not sufficient component of economic growth is a net growth in the supply of money in circulation or in savings. Michael Hoexter

    Yes, because 1) a fixed money supply encourages risk-free money hoarding as a means to gain purchasing purchasing power but progress requires investment, not money hoarding and 2) the counterfeiting cartel (the banks) creates the principal but not the interest for the loans they use to drive the population into debt.

    Bank and other private sector-to-private sector loans have no net effect in the growth of money, even though they temporarily create money Michael Hoexter

    How “temporary” is a 30-year mortgage? And what difference does the temporary nature of individual credit loans make if, in aggregate, the total amount of credit increases, at least until the population can afford no more debt and then destructive deflation follows?

    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. Michael Hoexter [emphasis added]

    Banks are legal counterfeiters that lend, not spend, their new money into existence for usury. As a result, we suffer not only price inflation when credit is created but also the destructive deflation when the credit is repaid and the interest is transferred to those with a low propensity to spend it.

    • It’s true a 30 year mortgage is a private sector to private sector loan with a very long repayment period. This is why it’s difficult to notice that initial injection of buying power that the loan enabled needs to be entirely withdrawn from the economy. More money needs to be injected into the system from somewhere else if there is going to be net monetary growth from that loan. If that didn’t happen, you would have the creation of real assets from that buying power provided by the loan but a gradual shrinkage of the economy and a deflation (not unlike our current situation). Economic growth in our current system involves both growth in real assets, goods, services and growth in monetary units to represent those real assets, goods, services.

      • This is why it’s difficult to notice that initial injection of buying power that the loan enabled needs to be entirely withdrawn from the economy. Michael Hoexter

        The problem is the orignial injection which is entirely unethical. Banks, via extensive government priviledge, are able to lend to some, the so-called “credit worthy”, the consficated purchasing power of the less or non-creditworthy. Banks therefore fail from a free market and an ethical viewpoint. They also fail from a stability viewpoint as history well attests.

        Is endogenous money creation therefore bad? No, it isn’t but it should be done ethically which means no government priviledges for money creators.

      • Could you write more about this, as in, a highlighted article? This is news to me, and I am fascinated.

  13. Since ‘debt’ and ‘deficit’ have different meanings and connotations in the context of fiat currencies than elsewhere, why don’t we have a contest to create completely new words for these concepts? Alternatively, why don’t we start using an italicized new version of the words in the free-floating, non-convertible context to emphasize difference eg. dette and dephicit Just some thoughts to start thinking farther outside the box when it comes to terminology.

  14. These articles are all wonderful…for college educated people, but they do zilch to reach the common man. The moment you say ‘net’ anything, you’ve lost ‘em. I know. I’ve tried.

    MMT has to produce basic articles and test them on their grandparents and the younger kids in the family. If grandma and grandpa don’t understand what you’re saying without prompting, back to the drawing board. You have to really listen to get at what is misunderstood.

    You need a basic glossary on this homepage that defines terms like ‘aggregate demand’ in one word, or defines ‘deficit’ first as ‘depends who’s talking’ or ‘depends who’s using it’, then define it under those criteria.

    I can explain the currency issuer/user bit, but when I get to the domestic, government, foreign sector balance stuff, and the government sector includes the state and local governments that were previously defined as users, and are now mixed in with the fed government issuers, eye glaze over. It doesn’t make sense to them.

    Anyone can write 12 pages, but distilling those 12 pages down to one meaningful paragraph takes real mastery. You people in Kansas need to call the neighborhood in for a day and try to explain it to them. Listen to what they don’t understand and address it.

    We used to do this years ago with complicated manuals for complicated systems. We hired 20-30 older temp workers (computerphobes) for the day, and fed them. It took over five hours before they would tell us the truth because they didn’t want to be rude or offend us or appear stupid themselves (and everyone fell asleep after lunch). We pretended we were the marketing department and needed to know what was wrong with the manuals; they had to use them to operate the systems. It was hard keeping our own mouths shut, but we had to. Finally, around 3-4 PM, they let loose, probably because they knew they were going home in an hour. These supposedly simple-minded people caught every lack of logic, every failure to address the proper process, every awkward explanation, and every assumption of prior knowledge. They were invaluable. A gift.

  15. Let’s go to the elementary family model Mosler proposes in his booklet. The father needs to get some work from his children so he imposes a tax which must be paid with labor for which the paper is the token. Or again, there is the African village example: the Brits need to get work from the natives so they impose the hut tax. The paper is simply a token of labor done in these cases. In short, a government: it needs to outfit itself: a military and a postal service, public works and utilities, and so on, it does so by imposing a tax. So now everyone works for dollars and therefore buys and sells with dollars. The government is thus in a position to buy labor for its purposes; hence it spends into the economy. In this sense it “contributes” to the economy. The more “advanced” or skillful the labor, the more it pays and the more it shows in the price of the stuff it produces and also sells. Now entire industries and services are created to serve governmental needs. Thus government contributes to the growth of the economy.

    Another question entirely is which is the right or most equitable tax to impose once it is clear conceptually that money is–or ought to be–conceived of as a public monopoly in the service of the public weal.

  16. And when a surplus is desirable in an MMT framework, do we say negative net contribution?
    Wouldn’t that also make it look like the original government expenditure was not desirable?

    I realise this is an unlikely outcome but it is still a possible one. We need to be prepared for it.

  17. A complaint one hears is that the system is inherently coercive. That is true, but all government is coercive to some extent, by definition. Human being decides that a society needs government and law and order. This is so even for the most rudimentary societies. Government could simply decree that their currency must be used for all transactions, but that would be superfluous and unnecessarily constricting. In fact, the tax is there to avoid inflation and, ideally, also to serve the public good by way of redistribution of wealth, controlling dangerous concentrations of wealth, and in short, to serve social justice. Currently, our tax system is woefully inadequate and unjust, and we are paying a very dear price for it. One of the prime functions of government is to control human excess, human injustice, and the like. This is where we are failing, in that we have created a criminogenic environment, thanks to allowing carte blanche to corporate power and influence.

  18. That should be “human beings decide…”

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  21. (I posted the following on Daily Kos in a diary which links to this diary or post.)

    This is an excellent diary, and it provides, for me at least, confirmation of the need for some ideas that I have been working on for some years now. MMT, in general, as everybody realizes, has enormous potential. However, I think that the discussion is severely limited by the need to explain things in terms of the way our current system works and in terms of the way that the intelligentsia converse with each other about it.

    The current system is seriously flawed as an instrument for managing our national resources, including the collective productivity of the People. I think that using the family budget approach can be very useful.

    To wit, every hypothetical family has goals that can usually only be achieved over time. By working, the family breadwinners exchange their time on this earth for the money they need to make their goals a reality. Educations for their children, housing, clothing, health care, transportation, vacations, and all the rest. They sell the only thing they have to sell: the sweat of their brows and the power of their brains, which I call personal productive power (PPP), which can only be expended over time. Early death, divorce, health problems, unemployment, theft of time and services by nefarious institutions such as the Wall Street banks, purchase of goods and services that fail to work satisfactorily and thereby squander the time that the family spent to make the purchases, and all the rest serve to destroy the earning power, the PPP, of each person and family, and can result in heartbreaking disappointment as their goals are not met, and they run out of time.

    Our national system, devoid as it is of goals, does a rotten job of assisting the People, through their families, in realizing their goals. That is the heart of our problem. All consumption of our national productive assets, NPA, should be directed explicitly toward serving the goals of the family unit, and maximizing the efficiency of their PPP. And, ultimately, the management of our productive assets should be discussed and planned on a generational basis. We should have national plans and goals based on the life cycle of human beings, and those can be organized along the lines of four generations of twenty-five years each. The youngest generation will be all Americans under age 26, or in other words, those of ages 0 through 25. Then 26-50, 51-75, and 76-till the end.

    The youngest generation’s age span correlates exactly with the development of their brains, and the goals for that generation should be focused on education with the government providing maximum resources to make certain that the time on earth for that generation is spent in the best way possible to give the People in that generation the best chance of achieving their goals and, in turn, producing individual and national wealth in assets that will serve the coming generations as well as the older generations.
    Each generation will have a role to play, and this approach has the signal advantage of changing our national conversation to one that is goal-oriented and which includes all the People. The “government” is a term that will cease to be of importance. The goals will be the topic of conversation: what they are, how to reach them, and how we are doing.

    So, money, in this generational, goal, PPP, and NPA approach is primarily a tool the shows how much of our NPA we wish to invest in each generation, which, to aid discussion, analysis and management will be broken down into projects of NPA value. Thus money is simply a record-keeping tool that helps the nation and the family to measure our progress.

    But because we need to worry about inflation and the need to have our currency accepted on favorable terms in other nations, we need to manage our money toward those ends. So money can fill two roles. The first is as an investment in America, in which the People will be given their money in exchange for working on projects of national value. The second is as a tool for coping, hopefully controlling, inflation and the international standing and acceptance of our currency and our goods and services. In both cases money will be viewed by all concerned as simply a record-keeping device and which will be understood in terms of the purposes it serves.

    Now the foregoing implies a national system structure that is far different from the one we have today. But it is already beginning to form. For example the development of MMT shows how the Internet and other media, through diaries such as this one and others, can be used to develop complex, useful, ideas in a collaborative, collegial way. In other words we the People will rely on systems that will enable us to join our hearts, hands, and brains and do many mighty things.

    For whatever it may be worth, the foregoing is a summary, developed in just a few minutes this morning, of more elaborate ideas that I develop more fully in a book that I am readying for publication. I hope to have it out before Father’s Day.

  22. I have been developing a further summary of MMT/FF for use as a compressed version in language that is more accessible to the public as part of a economic literacy effort I have been pressing for about ten years now. There comes a point when little personal credit can be claimed.

    Additionally there is a need to reach to specific kindred discourses in terms that they can assimilate quickly. In particular there is a whole discourse which interprets from the perspective of the “commons.” Many of their writers are invested in broad brush strokes, not unlike the neo-classical theo-economic model, and just as lacking in the functional details. Reaching these existing conversations will entail adapting to their metaphors in part.

    Listing the various types of “money” in an ascending order of liquidity would give at least a relative degree of accessibility of net national contributions. It could also distinguish between fixed assets and currency available for circulation. Parsing out subsidies and the consumption of net national contributions toward warfare, which would also narrow the actually liquid portion of the net national contribution. There is a possibility here as well, I believe, to interpret the neo-classical fictions as if it was written from within the same MMT macro-economic model and measured by its net contributions. Even as well narrowed estimates the implications would possibly embarrass the true believers. If analyzed by the actual effects of net contributions going into essentially unproductive choices. The effects of grain subsidies in the US upon campesinos in Mexico could be at least more bluntly described, and thereby also the net negatives of counting those subsidies as net national contributions. As such it would be an analytical framework which would only be a bit more acute, relative what is also obvious otherwise. The depreciation of fixed assets such a bridges and building used to house social infrastructure such as health and educational activities could provide a view more closely corresponding the D- that the US has earned by neglect in preference to military hardware. This will raise a significant amount of righteous denial, instead of the convenience of neglect.

  23. Currently, private banks create money as debt and more money has to be continually created to pay the interest. Hence we get inflation or exponential growth of the money supply. There is absolutely no need for any sovereign government to go into debt to create money to spend into its economy. The hackneyed argument against doing this is that it will cause explosive inflation of prices for goods and services. The solution is to use taxation to actually destroy some of the money to give an optimum amount of money needed for an expanding economy.

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