Blogging the Zombies: Expansionary Austerity – Birth

Another instalment in the new  draft chapter on Expansionary Austerity, which I’m writing for the paperback edition of Zombie Economics. Comments and criticism much appreciated


Austerity measures of various kinds have been advocated, and implemented, in a wide variety of contexts. The term is used particularly in contexts like that of the present day, where government budget deficits arise as a result of (or at least in the context of) a recession, and where  it is proposed to return to budget balance through some combination of lower expenditure and higher taxes, usually with an emphasis on the former.

‘Austerity’ can also be used more generally, to apply to any situation where governments seek to reduce levels of public debt by running budgeted surpluses.  A notable example, with which the term ‘austerity’ is particularly associated, was that of Britain in the years after 1945. Victory in World War II had come at a huge cost. Britain was heavily indebted, particularly to the United States, and much of its overseas wealth had been destroyed. In these circumstances, there was little alternative to a policy designed to reduce imports, through rationing of a wide range of goods including food, and to maintain budget surpluses.

Nevertheless, the austerity of the 1940s and early 1950s was combined with policies that laid the foundation for widely-shared postwar prosperity. For the first time since the early 20th century, full employment was achieved and maintained for several decades. The National Health Service, which provided free medical and dental care to all was established, along with many other programs of the postwar welfare state.

The critical difference between these policies and the austerity programs now being adopted in Britain and elsewhere was the fact that they were introduced at a time of full employment, sustained by demand that had been suppressed during the war years and by expansionary monetary policy.  The result was that austerity policies, combined with devaluation succeeded in restoring external balance and reducing the ratio of public debt to national income. By contrast, under conditions of high unemployment, austerity measures reduce aggregate demand, and lead to further waste of resources through unemployment.

From the viewpoint of believer’s in Say’s Law, this distinction is meaningless. According to Say’s Law, unemployment can never arise through a deficiency in demand. It follows that, whenever government budgets are in deficit and public debt is excessive, austerity is the appropriate response. By reducing public demands on capital markets, it is claimed, austerity will make it easier for provide firms to investment. Thus, austerity is presented as an expansionary policy that will promote economic growth.

This idea of expansionary austerity can be traced at least as far back as the ‘Treasury View’ which determined the official policy response to the Great Depression in Britain. The most famous statement of the Treasury view is that of Winston Churchill, then Chancellor of the Exchequer, who defended

the orthodox Treasury doctrine which has steadfastly held that, whatever might be the political and social advantages, very little additional employment, and no permanent additional employment can, in fact, and as a general rule, be created by state borrowing and state expenditure” (House of Commons 1929, p. 54).

In his Budget speech of that year

“The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.” 

The Treasury view, stated in this way, is a restatement  of Say’s Law, or, in more modern terminology, the claim that public expenditure, by driving up interest rates (the “rent of money”) will always crowd out an equal amount of (typically more productive) private investment or private consumption.

There was, in a sense, nothing new in the Treasury view except the need  to offer an explicit statement of what had been, for most of the 19th century, an unchallenged orthodoxy.  As the chronic unemployment of the 1920s deepened into the Great Depression in 1929, the Liberal Party, supported by John Maynard Keynes advocated public works to stimulate the economy. 

The Treasury opposed these policies. This was partly because of their adherence to the classical model of macroeconomics, now described as the Treasury view, in which sustained unemployment could only arise as a result of problems specific to labor markets, such as minimum wages or recalcitrant unions. 

Underlying their opposition to fiscal stimulus, however, was a fear, entirely justified in its own terms, that an interventionist macroeconomic policy would pave the way for intervention in other areas and for the end of the liberal economic order based on the gold standard, unregulated financial markets and a minimal state. These fears were to be realised in the decades after 1945, when the combination of full employment and Keynesian macroeconomic management provided supported for the expansion of the welfare state, tight control of the financial sector and extensive government intervention in the economy.

Posted via email from John’s posterous

61 thoughts on “Blogging the Zombies: Expansionary Austerity – Birth

  1. What is amusing is that after WWI Germany was crushed by war ‘reparations’ for losing the war and after WWII Britain was crushed by war ‘reparations’ for winning the war.

  2. A few thoughts

    From the BBC this morning came

    1 On the 25% of incomes into 1% of pockets……. what if that rose to 33% of incomes into 1% of pockets. This is by way of examining the advisability of persisting with the ideology of freedom of wealth accumulation.

    2 By way of thinking out Austerity. If one family decides to save to reduce debt then this will have no significant impact. But if all families at the same time reduce spending to reduce debt then this has the effect of reducing incomes and is self defeating.

    I want to make the point also that “productivity growth” is an equally noxious notion to a stressed economy,……versus uniform productivity.

    Improved productivity is one of those euphemistic terms that is used in the same way as parents talk about sex in the presence of their your children. To a capitalist it is all about concentrating wealth via improved profits. To a government it is thought about the warm fuzzy of improving the economy. To an employee union it is all about longer hours for less return. To a Libertarian it is all about being released from the confines of sharing so that the most energetic can rise to their highest level of output for personal gain.

    Industrialists realise that people working harder is unsutainable. People working longer for less is desirable but devisive. People working more efficiently is more successful but is a once off improvement step. Achieving higher throughput with fewer people is the most successful but requires an improved technological position.

    For a Commercialist improved productivity is about achieving higher throughput with the available capital, and this means lower priced goods (imports) into wealthier markets.

    For a Financialist improved productivity means higher throughput of capital with the minimum handling cost or with a higher leverage. Think ATM’s, internet banking and off shore call centres.

    All in all higher productivity is a means of concentrating wealth and reducing human involvement. Not want you need in a Global Recession.

    Uniform productivity is a more useful recovery strategy. I believe. So what would that entail?

  3. “The critical difference between these policies and the austerity programs now being adopted in Britain and elsewhere was the fact that they were introduced at a time of full employment, sustained by demand that had been suppressed during the war years and by expansionary monetary policy.”

    Another difference between then and now is in the psychological and social attitudes toward the austerity measures. Back then I think, British people felt a bond with each other. They had been forged into one tribe by the war and whether it was true or not, the belief was that everyone was part of the austerity measures and the rich would play their part.

    Who believes today that the 1% will be part of the project and practice austerity themselves? Their religion precludes any attitude but selfishness and self promotion at the expense of other less able people.

  4. If I was you, I’d address the latest problems of US debt.

    [From ]

    The indebtedness of the US has reached a new milestone. US is now part of the elite group of indebted countries whose debt has exceeded its gross domestic product (GDP). The national debt of the US is now about US$ 15.033 trillion, marginally higher than its US$ 15.032 trillion GDP. What happens when a country’s debt is as large as its GDP? Or for that matter any business entity? In such a situation, the revenue or the GDP has to grow at least at the rate at which the debt is borrowed. This is so that the borrowing entity can break even and is able pay the interest without taking on more debt. But what if the economy slips into recession? It may not be so much of a worry if there is a cyclical dip, which is part and parcel of the economy. However, it is a serious threat if the dip is due to structural imbalances in revenues and expenses. The problem which is the US is facing is the latter and that is why it is something really to worry about.

    Also see:

    What economic theory provides for stability if per capita debt increases more than per capita GDP? This is the “uber zombies”.

  5. Somehow the US and its debt problems keep managing to avoid the spotlight. That only one of their patriotic rating agencies has lowered them from triple A is a complete joke. Their debt is a concern because their government has a Greek like unwillingness to bit the bullet. Unlike Greece which at least is capable of succumbing to external pressure to finally do the right thing, who can envisage the US being cajoled into getting its house in order? The US is great at spending its time telling every other country what it ought to be doing but will be the last to accept good foreign advice.

  6. grammar? “By reducing public demands on capital markets, it is claimed, austerity will make it easier for provide firms to investment.”

  7. Bilb touches on the “paradox of thrift”. Thrift is supposedly a virtue. However, if everyone becomes thrifty at the same time, spending is reduced, aggregate demand drops and the nation drops into recession or even depression. “Everyone” includes the government of course, so if a government cuts (austerity) in a recession then it deepens the recession.

    Is mass thrift (or austerity) a virtue? Is mass strong spending a virtue? Well the answers are that it all depends on the circumstances. It is not possible to give these questions a sensible answer unless you consider the full context and current condition of the whole economy.

    Public debt is not the danger it is supposed to be. Excess private debt is what really matters. In the absence of reasonable wage rises, consumers kept up spending and aggregate demand by taking on more debt. This debt rose to unserviceable levels in many countries. Paying down the debt (delevereging) took aggregate demanad out of the system, hence the GFC. Junk derivatives played a role too.

    Getting back to the public debt issue. A government of a substantial economy (say G20) which issues a fiat currency rarely or never has any real need to take on debt (except if it wants to issue bonds to set interest rates). A government with a fiat currency can run surpluses and deficits in an appropriate, counter-cyclical manner over the economic cycle. Again, surpluses and deficits are not good or bad in themselves, they are only good or bad relative to the needs of the economy. What is more, over many cycles, the budget does not have to balance. Indeed experience shows empirically that a net deficit needs to be run over the long term, particularly to maintain full employment.

    The notion that budgets must balance over many cycles is spurious nonsense. How would the money supply expand? Only the government, via issuing fiat currency, makes permanent new money. Anyone else making permanent new money is counterfeiting, by definition. Commercial bank loans are not permanent new money as the money is extinguished when the loan is repaid. I guess it is possible that defaulting on debt creates permanent new money by… well by default. The money created and borrowed is still in circulation but by virtue of the default it does not extinguish the debt. The bank will have to extinguish the debt with other money assets. If the bank fails and goes bankrupt with the debts outstanding then perhaps some permanent new money has been created by default.

    All of this (except for my speculations on defaults) is so simple, so logical, so empirically verifiable and so well explained by the real economists (not the neoliberal ideologues and machiavellian liars) that I am becoming highly frustrated that the debate wasn’t settled long ago. The rank stupidity, cupidity, gullibility and rancidity of both the masses and the elites under the false consciousness of late capitalism is appalling. We had better change this system darn fast or we will enter the Great Depression Mark Two.

  8. Echoing Julie Thomas, I note that the Premiers’ Plan of 1932 – the Australian version of the old austerity – made some attempt to make the rich share the pain being inflicted on the working class. Interest rates on bank deposits and government bonds held by Australian investors were cut by the same amount as wages and pensions. The modern austerity by contrast attempts to shield the rich from any pain whatever.

  9. No pain should be inflicted on the rich because that would interfere with trickle down. After all, since that great idea was first spruiked the 99% have been drenched through with wealth from above.

  10. A couple of typos:

    “…austerity will make it easier for provide firms to investment” doesn’t look right.

    I think you need a comma after “supported by John Maynard Keynes”.

  11. Chris Warren :
    …The indebtedness of the US has reached a new milestone. US is now part of the elite group of indebted countries whose debt has exceeded its gross domestic product (GDP). The national debt of the US is now about US$ 15.033 trillion, marginally higher than its US$ 15.032 trillion GDP….

    Er, what you mean is that debt is more than one year’s GDP. Debit is in dollars; GDP is in dollars per year. So the ratio is a time. For example, “150% of GDP” is properly “18 months’ GDP”.
    No doubt a year’s GDP is a lot of debt, but I cannot see why one year, specifically, is some sort of magic number that should trigger any alarm bells.

  12. Gross Domestic Product is usually expressed on an annual basis which would make saying 100% or 100% perfectly OK. I am not sure anyone thinks debt/GDP being one is some type of magic number. Certainly noteworthy having such a large debt to GDP ratio though.

  13. @Martin

    I have made the comment many times before – the problem is the long term trend for per capita debt to increase in capitalist economies. The fact that US debt has now gone over 100% of GDP is part of this pattern.

    The alarm bells should have been ringing ever since 1901, but have been artifically muted by population increase, war and foreign markets.

    The real ‘alarm bell’ is the reverberations echoing due to the general trend in most OECD economies for macroeconomic instability to balloon out of control. The reference has been posted numerous times.

    If the ratio of 150% of GDP in one financial year is (supposedly) ’18 months GDP'(??)

    then surely in 18 months the ration is 200% GDP ? which you may want to say is ’24 months GDP’ ?

    But in 24 months the ratio could well be 300% GDP.

    Based on your assumptions. So where does this end?

  14. Martin, I understand it to be a more an empirical statement about it seeming to be the case that countries begin running into macro trouble when their debt hits roughly 70-80% of GDP, rather than some direct comparison that is troubling just because.

  15. Can anyone explain to me why a substanstial G20 government which issues its own fiat currency (so not the Europeans at the moment) EVER needs to go into debt? Can not that government simply run deficits?

    Let me quote Bill Mitchell from his blog;

    “In particular, we have to disabuse ourselves of the notion that when governments deficit spend they automatically have to borrow which then places pressure on the money markets (which have limited funds available for lending) and the rising interest rates squeeze private investment spending which is productive. This chain of argument is nonsensical and is easily dismissed.”

    And again;

    “the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household…;
    Any coincident issuing of government debt (bonds) has nothing to do with “financing” the government spending….”

    It seems to me that MMT logic is irrefutable in this regard. Bill Mitchell sums up;

    “The important conclusion is that the Federal government is not financially constrained and can spend as much as it chooses up to the limit of what is offered for sale. There is not inevitability that this spending will be inflationary and it does not necessarily require any increase in government debt.”

  16. I probably should add that Bill Mitchell’s summing up must be read carefully and literally, so here it is again followed by warnings to be strictly literal in interpreting it.

    “The important conclusion is that the Federal government is not financially constrained and can spend as much as it chooses up to the limit of what is offered for sale. There is not inevitability that this spending will be inflationary and it does not necessarily require any increase in government debt.”

    1. “the government is not FINANCIALLY constrained.” Correct, the government is not financially contstrained but it is real world constrained i.e. it can only “buy up to the limit of what is offered for sale”.

    2. “There is not INEVITABILITY that this spending will be inflationary.” Inflation could occur under some circumstances but deficit spending does NOT inevitably cause inflation in all circumstances.

    3. “it (deficit spending) does not NECESSARILY require any increase in government debt.” It could under certain circumstances be expeditious or beneficial for other reasons to increase government debt to deficit spend but it is not strictly necessary issue debt to faciliate deficit spending.

    What people need to understand, in my view, is that fiat money is not real in the sense that goods and services with their observable material nature are real. In this sense fiat money is notional not real. Therefore it is logical and necessary for a government to manipulate this notional system in a manner where the primary rules for action come from real world signals (unemployment, depressed provision of goods and services and so on) and not from the notional system signals. Secondarily, the government be careful to keep the notional system (like any tool) in good working order. However, merely invented strictures (whose invention comes from considering the notional system to be as real as the real world itself ) must not be allowed to rule the government’s actions.

  17. @Dan
    Dan – you need to ask the right questions to the right people to get a right answer. Suggest you read some of the core MMT material and make up your own mind. JohnnyQ has consigned MMT to the ‘sandpit’ where the children play; while the adults get serious (screwing up the world with even more confusion).

    My advice is start with an Idea and gather up all of the concepts – like a ‘light’ around which the moths (concepts) gather. Most commentators on this blog haven’t got a clue; they keep repeating the same old rubbish MMT debunked 20 years ago – JohnQ just doesn’t get MMT and I guess probably never will now that his attitude has crystallised. It takes a fresh mind and steady focus! You will have to develop your own understanding.

    That’s a good thing! Most people carry around concepts like baggage – other people’s baggage. You have to learn to think for yourself. Good luck with that …!

    Cheers …

  18. Can anyone explain to me why I ever have to work? Why couldn’t the government just give me money that they print, not from taxation, and then I could spend it and no one would be worse off and I, certainly, would be better off? Wouldn’t it be great? Now I think I will go work on my amazing new monetary theory of economics based on a magic pudding. Oh, just thought, Tony Abbott has the patent on that one.

  19. To give a final response on MMT. Everything cited by Ikonoklast is correct. To wit

    1. There is an arithmetic identity between government spending and the sum of tax revenue, net debt issue and money creation
    2. Money creation is not INEVITABLY inflationary (emphasis in original), and in particular, in a liquidity trap like that observed at present, it’s possible to create lots of money without any inflation (at least, without any immediate inflation)

    So, as regards the current situation there’s not much difference between MMT and standard Keynesianism. The difficulty arises with the other side of point 2, which I would write as

    3. Money creation IS inflationary under conditions other than those of a liquidity trap, if the amount of money created exceeds the demand for cash balances . Since this demand is around 0.5 per cent of GDP, MMT theory correctly applied requires that money creation should be held to a level consistent with the growth in demand for cash balances, and the rest of public expenditure (that is, nearly all of it) must be financed either by net debt or by taxation.

    I made point 3 a while ago, and couldn’t get anything I regarded as a straight answer from the MMT advocates here or elsewhere. I’ll allow one last chance, before consigning this debate to the sandpits for good.

  20. Drat! And here was I relying on that magic pudding to finance my retirement!

    John, here is an interesting paper on the EMH by someone who should know better.

    Click to access EMH.pdf

    It starts off by saying that if the EMH is true then no one could have predicted the collapse of the bubble. Gee. I thought a bubble existing is refutation of the EMH. But the end of the paper is great, “One might take the view that it was the failure to believe the EMH that was in fact responsible for the crisis!”.

  21. Do I understand correctly that the MMT consists of the proposition: The identity given in 1 of 22 on this page also holds if the term debt is set to zero?

  22. “One might take the view that it was the failure to believe the EMH that was in fact responsible for the crisis!”

    Looks like another example of the same sort of austerity as justified punishment in some type of morality play type thinking the loony right seems fond of. “You did not believe, hence you have been rightly punished by that fair and just God – the Market.” Supplicant: “Couldn’t I just say a couple of Hail Marys?

  23. Here is my answer to JQ’s reply.

    MMT desribes the following idenity at the heart of national income accounting in a fiat currency system (and I quote from Bill Mitchell);

    “(G-T) = (S-I) – NX

    The left-hand side depicts the public balance as the difference between government spending G and government taxation T. The right-hand side shows the non-government balance, which is the sum of the private and foreign balances where S is saving, I is investment and NX is net exports. With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.”

    This is the only identity I am willing to assert with my layperson’s understanding and with an MMT advocate’s impratur as it were.

    Professor JQ asserts;

    “Money creation IS inflationary under conditions other than those of a liquidity trap, if the amount of money created exceeds the demand for cash balances . Since this demand is around 0.5 per cent of GDP, MMT theory correctly applied requires that money creation should be held to a level consistent with the growth in demand for cash balances, and the rest of public expenditure (that is, nearly all of it) must be financed either by net debt or by taxation. ”

    I admit I am more than a little puzzled by this set of assertions. First, JQ states that money creation is always inflationary in any conditions other than a liquidity trap if it exceeds the demand for cash balances. The demand for cash balances is implied to be always relatively stable as no mention is made of it departing significantly from 0.5 per cent of GDP. No mention is made of unemployment nor of any other under-utilised capacity or potential in the economy.

    It seems to be assumed that money creation that does not go into cash balances is inflationary because it is chasing a fixed level of goods and services production. There seems to be no acknowledgement that money creation (say via the path of extra deficit spending to employ more public servants) in an under-utilised economy (with high unemployment and high under-employment) will stimulate aggregate demand and thus the created money will soon chase more goods and services and not create significant inflation.

    I don’t for a moment believe serious MMT is saying “create as much money as you like and it will never be inflationary”. Nor do I believe JQ believes MMT is saying this. MMT is saying that deficit spending to the appropriate level can be used to remove unemployment, under-employment and general under-utilisation in the economy and that deficit spending to this level will not be significantly inflationary and need not be funded wholly by taxation and borrowing. One should probably add that a “semi-starved” economy like a semi-starved person would need to be introduced to a richer diet and built up in a gradual and metered way to a full diet, otherwise strong, immediate deficit funding increases would exceed the uptake capacity of the system.

    The difference between MMT and Keynesianism is not great in my opinion. However, MMT does take cognizance of the fact the gold standard has ended and nations like the US and Australia run fiat currency systems. MMT is not a theory in that part that describes national accounts but an empirical description of the system in existence.

    My personal view is this. The argument about whether, in a fiat system, taxation pays for expenditure (standard economic view) or taxation is money destroyed and expenditure is money created is largely a theoretical argument without practical consequences. (Although MMT is logically correct in the pure theoretical sense.) At the practical level, the sums come out the same.

    Standard view is Taxation of X – Expenditure of X = Balanced Budget

    MMT view is Money Created of X – Money Destroyed of X = Balanced Budget.

    MMT merely emphasises that fiat money logically must be created first before the private sector can acquire it and subsequently extinguish tax obligations with it. What obscures and obfusactes this pure financial accounting fact under a now fiat currency is that we are dealing with an evolved system with a history reaching back to past years and even into non-fiat times. Fiat money presents itself to us as pre-existent. However, as money is a notional accounting phenomenon, the issue, at the national accounting level, of whether it is pre-existent and carried over or newly created by government spending and then extinguished by taxation is immaterial. I mean other than the issue that we should recognise that a government is not financially constrained to spending only precisely what it can tax and what it can borrow. It can at any time deficit spend and create money and provided this is done in a way that the real economy can take up this money and reduce unemployment and capacity under-utilisation and if this is done carefully there is no real danger of excess inflation.

    MMT also has (again in my opinion) a prescriptive moral philsophy element. MMT says the goal of economic management should be full employment and the consequent full utilisation and realisation of human potential (the fullest possible in our current system). MMT de-mystifies the money system, exposes a number orthodox financial strictures as false but still recognises real world limits.

  24. “but still recognises real world limits.”

    If by this, the 0.5 per cent of GDP I mentioned, we’re fine. Otherwise, how about making the claim specific. Under current Australian conditions, is anyone willing to claim that the government could quadruple the money supply without inflation? That’s about what would be needed to eliminate the very modest budget deficit we now have without issuing debt. If you don’t like 400 per cent, what number would you care to nominate?

    I’m already thinking I made a mistake responding here – I’m guessing that the whole thread is going to be me pressing for actual numbers, while MMTers dance around the point, talking about identities, order of causation and so on. So, unless you can answer the question – how much money can Australia print right now without worrying about inflation, I think it’s time for the sandpits.

  25. Why not rename the sandpit “Perpetual Motion Machine Monetary Theories Sandpit”? Even the ‘Free Money” the government gets at the moment has more or less the same costs as a claim on output that revenue raised by income has. Unfortunately there is no evidence that these ‘theorists’ have discovered a magic pudding.

    I was thinking in your paperback you could title one new chapter toward the end of the book ‘Reanimation’. The chapter could be about the absurd reactions and ‘explanations’ provided by zombie economists as they try to breath life into their long dead theories. Stephen J. Brown’s EMH paper might have good quotes and material to critique but there would be such a bountiful wealth of nonsense that has been created defending the indefensible since the GFC that you would have an extraordinarily wide choice. Fama and Greenspan seem quite willing to produce useful material also.

  26. Belie that chapter title suggestion. I see that in the hardcover edition you have reanimation as a section in most chapters. Still, as zombie economists have put so much effort into reviving their loved ones I think it would be worthwhile having a chapter near the end devoted to their most recent efforts. The chapter could be called “Dawn of the Dead” Or “Reborn of the Dead” or undead if that sounds better. I imagine the chapter could begin with some coverage and comment on the post GFC MPS meeting in New York where the true believers got together to nut out a least incredible story of why everything that had happened was not inconsistent and maybe even confirmation of what they sincerely believed all along. Since they have developed their ‘party’ line, faithful followers have trotted them out repeatedly and with such skill that the uninitiated could mistake them for thinking sentient beings rather than the ex-parrots they all are, albeit all talking and walking ex-parrots. Party faithful have reproduced these talking points ad nauseum on this blog, and I’ve heard them frequently from the usual suspects in various media.

  27. The birth analogy is the appropriate perspective, and in many ways.

    We generally think of the “present” as being a portion of a “steady state” existence, only slightly better or worse than “before”. That impression is so far from reality that our very existence is threatened by the failure to perceive our real situation.

    Birth 1900

    Think of everything prior to 1900 as a gestation period for the human phenomenon. 1900… one billion people (cells) …..knowledge embrionic…..situation stable…..environment pristine.

    Then think of the next 60 years as being childhood and adolescence…to population (body size) three billion.

    Now consider the present as young mature adult. population (body size) 7 billion….knowledge extensive….environment (living space) compromised….situation challenged.


    The human phenomenon is a process of evolution. The same as everything in life. So if one thinks of our current situation in these terms then it is clearer as to why our economic theories remain……theories. They are constantly struggling to keep up with the process of growth of our human mass.

    If we think of humanity as one organism then one can look at our situation in very different ways. For starters there is more than sufficient…left…of our environemnt to sustain our being. if all things were equal then all of the peoples of the earth are able to live comfortably. Our problem is entirely one of circulation and distribution. Some parts of the body (of humanity) are hoarding resources at the expense of others,…quite intentionally.

    So. To our immediate situation….and Austerity. I’m still thinking about it. But the thought that constantly comes to the surface is “how do we stimulate circulation”. Consider Greece. A very diverse nation with an ancient history of civility, friends and foes. Many people spread out over a mess of islands with a broad perspective on life from the village subsistance existence to the ultra modern financier manipulator, thrust into the melting pot of hyper productive Europe with a very different social support structure.

    Austerity is about bank balances. Productive performance is about servicing them. The real issue is how do we stimulate productive performance, uniformally? And without destroying our situation in the process?

    Austerity is a loss of heat and will lead to inactivity and collapse, unless the body (of humanity) is mentally pre prepared to work though despite the cold.

    And then there is the environment.

  28. @John Quiggin
    I think to be fair John, nobody could answer your question for sure. If Govt. creates new NFA’s without debt, ( fiscal ‘shock’) then there will be spending multipliers at work.

    I also think the logic behind a balance sheet recession is more compelling than a liquidity trap (Krugman got Japan wrong)! Paraphrasing from Cullen Roche:

    + In the US corporations and banks are profiting;
    + There is some level of cash hoarding going on – but real median annual incomes have declined by ~ 10%;
    + Unemployment and private sector debt are high (no credit for me thankyou very much);
    + The housing bubble has burst;
    + Unsustainable debt:income levels are reversing – households are not hoarding cash, but diverting a high proportion of income to debt service and necessities;
    + No-one on OWS complains about having too much cash”.

    I think if you sincerely believe MMT to be not worth discussing you should just be honest and forthright and deny it on your blog.

  29. “I think to be fair John, nobody could answer your question for sure.”

    I can answer it with high confidence. The only way to get Australians to hold four times their current cash balances would be to reduce interest rates to a near-zero level and, in Australia’s current circumstances that would produce inflation, either directly or via an asset market bubble.

    Since quadrupling the money supply would finance expenditure (once-off) equal to about 1.5 per cent of GDP, I conclude that, for practical purposes, Australian government expenditure must be financed by taxation (debt can be used to vary the timing, but debts have to be repaid out of taxes).

    So, last chance, and referring specifically to Australia’s current situation, does MMT say I am right or wrong? If you can give me a straight Yes or No answer on this, with some kind of supporting argument, I’ll read it with interest.

    Otherwise I’ll conclude that, whether or not MMT is worth discussing, it is not worth me discussing it here.

  30. A doctrine ripe for the picking by the Western Right, such an easy doctrine to justify the resurrection of a species of, “Road to Serfdom”.

  31. @John Quiggin
    Dear John,

    Well, am a bit nervous that the last spin of the dice for MMT may rest with one lay reader!

    I understand that MMT would say you are WRONG to believe: “Australian government expenditure must be financed by taxation (debt can be used to vary the timing, but debts have to be repaid out of taxes)”.

    I understand that by ‘must be financed’ you mean eventually or in the final analysis.

    One supporting argument for the MMT position I provided a link to in your first Zombies post, which nobody seems to have bothered reading? Shall provide it again as counter-factual: Can taxes and bonds finance Govt. spending? Stephanie Bell (Kelton)

    ” …it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money.”

    If you do conclude MMT is not worth you discussing then I have no objections to that (just the sandpit bit): the mind, like real estate, is your own property! It’s your blog.

    I still enjoy reading other topics you write about …


  32. “+ No-one on OWS complains about having too much cash”

    I wonder whether a liquidity trap is where if you give people extra money they keep it as part of their security blanket and don’t spend it, or whether it is where they complain even more loudly about having too much money? If you feel that you have too much cash the problem is easily solved by spending it. And, there are more than poor households in an economy. Businesses, banks and others are hoarding liquidity. Either that or some monster has hold of it. QE could not have managed to have so little impact on inflation in the US and elsewhere if liquidity wasn’t being hoarded.

    That said, any comments by anyone on revision of the book?

  33. JQ

    In case you have not heard the news the speaker of the house, Harry Jenkins, has resigned to “take an active part in the party political process” putting an unpaired coalition member in the seat.

  34. I sense I am exasperating mine host of the blog. It is honestly not intentional.

    I am arraigned for dancing around the point on the technical issue of money supply. In turn, I think I can justly indicate that Professor JQ did not address my point about under-utilised capacity in the economy. Instead he raised an ex ante theory point about money supply divorced from the real economy issue of under-utilised capacity and apparently predicated on an acceptance of the government budget constraint (GBC) framework.

    To quote Professor Bill Mitchell;

    “The GBC says that the budget deficit in year t is equal to the change in government debt over year t plus the change in high powered money over year t. So in mathematical terms it is written as:
    BD(t) = G(t) + rB(t-1) = Delta B(t) + Delta H(t)

    This says that the Budget deficit = Government spending + Government interest payments – Tax receipts must equal (be “financed” by) a change in Bonds (B) and/or a change in high powered money (H). The triangle sign (delta) is just shorthand for the change in a variable.”
    I apologise that I cannot render (t) and (t-1) in subscript rather than in brackets in this blog and nor can I render the delta symbol.

    Bill Mitchell further states;

    “The mainstream economist considers this (the GBC) to be an ex ante (before the fact) financial constraint that the government is bound by. They also erroneously claim that “money creation” results from the government asking the central bank to buy treasury bonds in return for printing “money” which the government then spends”

    So we see that the debate turns on a fundamental argument about money supply (or more strictly about money creation) and the recognition or non-recognition of under-utilised capacity. Modern orthodox economists claim that if governments deficit spend (without bond issuance) then the extra spending will cause accelerating inflation due to too much money chasing too few goods. These orthodox economists, in the main, take no notice of the reality of under-utilised capacity, the key issue here being all unemployment above the frictional rate. They assume away the existence of unemployment and/or assume that an increase in aggregate demand (fuelled by deficit spending) will not generate rising production of goods and services to absorb the spending.

    What JQ says about money creation and the demand for cash balances might hold true in a full employment, full-utilisation scenario and then his economics and MMT might both advocate similar settings. To utilise my earlier metaphor about a semi-starving (and consequently chronically stunted) economy, JQ wants me to immediately state the full “calorific value” of money creation that I would force-feed to this stunted economy from day one without due consideration for current capacity constraints (caused by stunting) which will take time to overcome. I am not willing to rise to this bait. Of course, we will make the economy ill (create inflation) if we don’t make the transition to the new regimen in a regulated and measured way. And of course once the bulking up process to correct weight (primarily meaning full employment) is complete then the diet of money creation must be moderated again at least to that level consistent with steady, low-inflationary growth.

    To take a further tack, behind the GBC assumption is the quantity theory of money. The quantity theory of money states (MV = PY where M is the stock of “money”, V is the velocity of circulation (or the times that M turns over per period), P is the price level and Y is real GDP. As Bill Mitchell says;

    “The relationship just says that total spending (MV) has to be equal to nominal GDP (real GDP times the price level) as a matter of national accounting. If you assume full capacity utilisation is always maintained and V is constant then any change in M must directly impact on P. So if M accelerates – under these assumptions – so will P (that is, inflation).”

    But it is the very assumption of the non-existence of business cycles and the non-existence (or at least insignificance) of unemployment and capacity under-utilisation that is fallacious in standard, modern, orthodox economics.

    I think MMT is misunderstood in its description of government financial freedom under a fiat system. It is simply saying that all orthodox ex ante financial rules and strictures about government money creation are historical and ideological baggage. Many of these rules were perhaps applicable under the gold standard and fixed currency exchange rates. They are no longer applicable. From a pure financial accounting point of view, a fiat currency government could create as much money as it likes. However, MMT also says there are real limits to the amount of money creation the government should “indulge” in.

    That is why Bill Mitchell says;

    “The only constraints on nominal government spending are real. The government can purchase whatever is for sale in the currency it issues whenever it chooses. Its past fiscal position is irrelevant to that capacity. Please note: that doesn’t mean it can spend infinite amounts without any problems. The statement is that it can – that is, the intrinsic capacity of a fiat-issuing government.

    So, please recite the next sentence several times – noting it is not a general jargon-ridden statement but a clear, concise, definitive fact – there is a real constraint on all spending (public and private).

    The government could keep driving nominal demand with ever increasing deficits beyond the full capacity point if it wanted to. Hyperinflation would eventually result. If government aims to promote public purpose via full employment and high real income growth then you would question the sanity of a government that pushed deficit growth beyond the full employment point.”

    In summary, what MMT is arguing for is the removal of ex ante, anachronistic, ideological and unempirical barriers to deficit spending under a fiat system. What it is not arguing for is the transgression of the real barriers which become most clear and operational at full capacity utilisation. Really, in terms of practical prescriptions for national economics, JQ and MMT would be in furious agreement just about across the board; both essentially decry the many zombie ideas that lead to the debt crisis and all the other lamentable outcomes of the GFC, especially higher unemployment.

    The thing is that MMT (which is much like Keynesianism in its practical prescriptions) could be tested empirically (my suggestion) with no real danger and a good probability of beneficial outcomes. In fact, we suffer an opportunity cost by not trying MMT-Keynesianism with a gradualist approach. At times other than those of full employment and unacceptable inflation, unfunded deficits could be gradually and progressively introduced. The reaction of the system would be monitored. With allowance for external shocks, we could assess MMT’s claims empirically. There is no good reason not to experiment on the economy in this way. After all, every application of contentious theory is in effect experimentation. And the current orthodoxy is contentious and can be said to have a bad track record post-GFC and after at least 30 years of persistent and significant unemployment.

    The debate has moved on in the time that it took me to write this so I might not necessarily have answered JQ’s most recent points. I think I missed the rubbish collection by putting my bin out too late due to writing this. That is the kind of thing about me that exasperates my good wife. 😉

  35. Ikonoclast

    I’m not really up with your argument, but a quick look here

    leads me to take the view that balancing budgets over time is not so much about manipulating an economy as it is about managing expectations. Government is an overhead, pure and simple. Government cannot BE the economy, unless it is a communist government (with the rider that government has a role of providing essentials that cannot be achieved with other means). Because the government is underwritten by the energy of its people it has a responsibility to them to operate conservatively. Greece is a classic case of the filure to constrain expectations laid upon government, and then ulitmately the failure of the people to take responsibility for that failure.


  36. @John Quiggin

    Well, I will probably put JQ off the in-blog MMT debate permanently with my final layperson’s reply but here goes my attempt. True MMt-ers would not necessarily adopt me by the way.

    MMT, to my understanding is not saying taxation is unneccesary. Taxation is functionally necessary in the current flows system of the financial economy and its effects on the real economy. Taxation withdraws spending power from the private sector so that the government may spend about that much (emphasis on the word “about”) without accelerating inflation. Yes, this is financing the government in a functional flows sense and in the context of the real economy. I am not hardline on this point. I am not insisting on semantic straw-splitting about financing. Taxation does in effect enable government spending to be non-inflationary on balance if the budget is balanced and the economy at full capacity. It does enable government to purchase real goods and services without creating inflationary over-demand.

    The above is not the issue of contention to me. I think the real argument is about what happens at the (very important) margins. I am saying that moderate deficits do not necessarily need to be financed, ever, though they may be financed in some circumstances if it achieves other policy goals like interest rate policy. By “financed” I mean being tied to bonds (debt issuance) and repaying these bond debts at a later time through taxation receipts.

    I am advocating this when these deficits are employed to stimulate demand, improve capacity utilisation and achieve full employment from the starting point of a generally mature, developed economy that has unemployment beyond the frictional and thus has under-utilised capacity. I really don’t understand why JQ studiously ignores the issue of unemployment and under-utilised capacity in the context of this debate when he, in general, certainly does not ignore these problems.

    I am saying that government needs to be substantially financed by taxation in the sense we agreed above but that it does not have to be wholly financed. JQ seems to imply via his Hard Keynesianism arguments that all deficits (typically deficits when they happen are a small percentage of Australia’s total budget) have to be financed by bonds and paid back or I don’t know what… the sky will fall perhaps? The onus is firmly on JQ to explain why budget deficits sufficient to stimulate up to full employment need to be financed.

    The introduction of the cash balances argument appears to be a diversion to me though JQ honestly believes it is central. It may be my ignorance of economics that is making me miss the point of the cash balances argument. I admit this. But I would wish that JQ would directly address the issue of unemployment and under-utilisation of capacity and explain why unfunded deficits (at the relative margins as explained above) are a no-no. What possible serious harm would eventuate? If a graded introduction of these type of deficits failed to improve employment and aggregate production then we could back off. It would prove MMT-Soft Keynesianism wrong in general or at least wrong in the specific context, there being some other constraints against improvement in employment rates and not yet elaborated in the theory or not yet addressed by concommitent public policy (better training and education for example).

  37. Bilb’s link is excellent by the way and the comparison of (realtively hard) Keynesianism to “MMT-ism” is much better than I could produce.

  38. Ikonoclast,

    The whole idea of saying anything about ‘money’ by using a one period accounting identity is so absurd that no quantity of words will be big enough to convince me otherwise.

    To put it clearly, to ‘print money’ (monetary authority) is a form of issuing debt securities. It just happens that the pay-off function of this type of security promisses to redeem the security with another security of the same kind (ie the face value printed on the piece of paper – or entered in an electronic equivalent – remains the same).

    In his post headed ‘money for nothing’, JQ said it all in the heading. You and I can’t eat securities (although snails can eat paper money – and computer viruses can eat ‘plastic money’). Nevertheless, food is an essential physical commodity for your and my survival.

  39. @Ikonoclast

    Given that this thread is supposed to be comments and criticisms related to the update/revision of the book for the paperback edition, wouldn’t it be better to follow JQ’s suggestion and move discussion of Perpetual Motion Machine Monetary Theories (and MMT) to the Sandpit?

  40. Yep, permanent sandpit time for MMT. I asked for Yes or No, and I got 1000 words repeating the same old stuff, but no answer.

    The news on the speakership looks like a big coup for the government, but let’s wait and see. These things sometimes backfire.

  41. Right O, I see I am drawing fire from several directions. Fire from JQ and EG concerns me. They know more than enough to sink any really leaky idea I float with a few of their well-aimed salvos. As a struggling layperson in economics, I am clearly on a hiding to nothing if I take on one (or maybe two?) Professors and/or PhDs in Economics and/or closely related fields.

    If JQ and EG can drag the layperson up a bit to understand the debate at a slightly more sophisticated level then so much the better. However, playing technical finesse cards (about current cash balances, the deficiency of one period accounting identities or the apparent “circuity” of fiat money as a debt security) a little cryptically whilst not answering substantive plain logic propositions put forward (eg. about deficit spending until under-utilised capacity is taken up) is perhaps not “playing cricket” entirely when debating with a layperson.

    I note that the heterodox economists like Steve Keen have been the ones who have successfully predicted the behaviour of the system and thus the GFC. I note that the current orthodoxy in economics and its proponents, instigators and supporters have consistently made a mess of the economy for the last 30 or 40 years. I note that unemployment and under-employment have never been solved under this orthodoxy and that the GFC and current European crisis are direct outcomes of continued adherence to this orthodoxy especially the notion that government budgets must always balance (even though they rarely do). I note that Steve Keen certainly does not use mere one period accounting identities nor equilibrium models but uses differential equations to model the dynamic instability of capitalism.

    I could go on noting things I guess, but as JQ has not yet answered (if he wishes) my larger posts above then I ought to desist and give him a chance to do so.

  42. @John Quiggin

    Sorry, our answers crossed in the ether.

    OK, fine JQ but how about giving answers to the clear substantive propositions I put forward. These are not necessarily MMT-centric propositions. I am honestly trying to understand why you and apparently Ernestine have such divergent opinions from Bill Mitchell and Steve Keen on at least some matters. You are all Professors of Economics (assuming Ernestine is) and yet there are such divergent opinions about what should be fundamentals of your profession. If I encountered such a divergance of opinion among qualified, practicing physicians about what caused diabetes I would be seriously concerned.

    So here are my substative questions again.

    1. Do absolutely all budget deficits have to be funded and if so why?

    2. Why cannot moderate unfunded deficits (with a moderate net unfunded nature over many business cycles) be used in parallel with other supporting measures (higher training and education for example) to stimulate the economy when there is significant unemployment and thus significant un-utilised capacity in the economy and why can this not occur (as you apparently imply with Hard Keynesianism advocacy) without creating accelerating inflation?

  43. @Ikonoclast Ask yourself a few questions.

    Is the amount (quantity) of money in an economy unrelated to the price level in the economy (in normal times and other things being equal)?

    Suppose the government passed a law and suddenly any cash, a $1 note, a $10 note and so on were deemed to be worth ten times their value and you could convert them into new notes with an additional zero, so everyone suddenly had ten times the cash they previously had, what do you think would start to happen to prices? (Again, in normal times and other things being equal.)

    If you have answers to these maybe you could provide those answers in the sandpit?

  44. Ikonoclast, the topic of the thread has to be respected. JQ usually allows a little bit of side-line talk, apparently relying on self-censurship. I’ll meet you on the last sandpit. In contrast to others, I don’t consider using the sandpit as insulting.

  45. @Ernestine Gross

    For sure, Ernestine. I am happy to discuss these issues in a sandpit. For starters though, a sandpit has to be opened by JQ. I don’t think my original post, being related to austerity and the alternatives, was entirely off-topic nor perhaps my second post. Afterwards, in an effort to answer JQ’s question, I became prolix, unfocused and probably more than a little out of my depth.

    Yet I maintain that my “substantive questions”, as I called them, are reasonable, not specifically MMT-centric and not at all unrelated to the topic. These questions remain unanswered but to be fair JQ is a busy professional man and I am feckless, retired layabout.

    I also maintain that I am attempting to learn why respected academic economists can have such widely divergent views and how I can determine which is more correct, more nearly correct or where I might find a synthesis that somewhat reconciles their positions.

    Perhaps I did need to apply more “self-censurship” (sic) which could be a just a typo or a maybe a delightful Freudian slip implying that I need to apply self censure-ship as well as self-censorship. Such a charge is not unreasonable given my ludicrously intellectually combative nature on very slim (some would say non-existent) scholarship.

  46. I beg everyone’s pardon and indulgence. JQ opened an MMT sandpit 2 days ago and I did not notice. I will take myself there forthwith.

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