6 Comments

  1. Teirys
    November 25, 2015 @ 1:07 am

    Bill,I have some comments riaerdgng the line of thinking more generally (also applying probably/roughly to Mosler and Kansas City, I think). These aren’t directly linked to the tax burden issue in this post, but they cut across some of the points that are part of the recurring theme. Hope this doesn’t come across as confrontational. That’s not my intention. I like your blog, and the others, but remain fundamentally flummoxed by one general aspect I perceive in the overall approach. So here goes.I’ve at least scanned most of your posts on the main issues, as well as at the other two blogs. I agree with much of what you and the others write about the operations of a fiat system, and the fact that there seems to be a real problem with main stream economists failing to understand it.My general impression however is that in making the case you and the others are combining the correct explanation of operational capability with a near-rejection of the real world importance of balance sheet “policy” restraints or constraints.E.g.: It’s quite clear the government has the operational capability to spend ‘till the cows come home, creating broad money and bank reserves in the process. There is no operational limit. But there is a real policy concern in terms of practical balance sheet debt and the interest burdens associated with it. And in the real world, that translates to the notion of a policy limit. And a policy limit is a constraint of sorts. My general impression is that your associated school of thought tends to demote the importance of such practical constraints in order to emphasize the correct operational understanding.The constraint shows up in this example in the following ways. First, the operational capability described requires the freedom for the government to run an unlimited overdraft at the central bank. Overdraft is equivalent to credit on demand. Both are equivalent to monetization on demand.So here’s the policy reality: When was the last time you saw such a government overdraft of any size on a central bank balance sheet?I’m sure you can read my mind for the rest of the argument from there. Suffice to say, there are decisions to be made about converting that overdraft into debt issued by the government, etc. Those are policy decisions that act as constraints on the operational freedom that is the foundation of this line of thinking.The idea that debt is an interest rate control mechanism in this sense is quite nifty. I like it as a coherent model of how government expenditure relates directly to choices about interest rate levels. Ground zero for interest rate control is the Fed funds rate. But when investors buy government bonds, they make some judgement about future policy for such interest rate control. But the interest rate issue isn’t entirely endogenous to the fact of control over issuing debt; at the end of the day, it is also a function of the market’s expectations for policy – including the Fed funds rate. That influences the yield curve for government debt. So policy is a big factor once again.My sense also is that your blog and the others seem to be driven by concerns mostly about the policy errors of excessive government surplus tendencies. That’s fine. But I don’t think it’s ideal to blend that concern into the description of operational capability. My impression is that as a result some operational capabilities are exaggerated while others are dismissed.Here are some examples of my concerns in this regard in the case of your post above:“It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past”I agree in a pure operational sense, because I understand how the balance sheets that are involved work.I disagree in a real world policy sense. There is obviously an implication from these debt decisions for sustainable or unsustainable interest on debt burdens. Alternatively, there is an implication in terms of sustainable or unsustainable inflation consequences if governments and central banks choose to keep their liabilities as excess broad money and bank reserves rather than term bond debt.While there is no capacity effect in terms of pure operational capability, there is in terms of policy freedom at the margin. The fact that there is complete operational freedom in theory doesn’t mean there is complete policy freedom in practice. That is, unless you think governments can issue money or debt without limit and without other financial consequences.Governments face these policy decisions about the amount and cost of their debt and the inflation consequences of the money they produce from their expenditures. They may not understand how their balance sheets work, but nevertheless these policy questions are real. As Mosler seems to say a lot, it is scary that the people making the policy decisions don’t understand how the government balance sheet and the monetary system work. Fair enough. But this doesn’t negate the fact that these policy decisions are issues for somebody to face. You can’t just run deficits without limit and let expenditures create money without limit, even if the operational capability would allow it. And I don’t believe this line of thinking should dismiss policy concerns as a sort of corollary to demonstrating the correct operational understanding. Policy is a necessary reality.“I explained how it is a nonsensical notion thinking that a sovereign government would “save” in its own currency.”This one is different, because it’s an example an operational statement with which I strongly disagree. And I think it’s a case where a policy bias against government surpluses has influenced the operational description.I will argue that the fact that a government issues its own currency has nothing whatsoever to do with its capacity to save. Here I’ve reversed roles in the sense that I’m talking about pure operational capability before turning to the question of policy restraints or constraints.First, consider (an operationally feasible case) where the central bank issues currency by purchasing private sector financial assets, rather than by purchasing government debt. And suppose the government has run a balanced budget up to this point. Now suppose the government decides to run a surplus.Now suppose the government decides it wants to manage its books “in paradigm”. (I’m not being cheeky here; just illustrating an operational point.) So in preparations for a surplus operation, the government “prepares” its balance sheet as follows.The government purchases existing non-government assets (probably financial assets) in an amount equal to the size of surplus it intends to run. At this stage, the government has simply acted as extension of its central bank, putting more money into the system by acquiring existing assets. So the government balance sheet, separated from but connected to the central bank balance sheet, shows non-government assets acquired and an overdraft at the central bank.The government then taxes the equivalent of the overdraft. Considering this flow effect for its balance sheet consequences, the government has created its own equity position (logical and economic, if not in actual bookkeeping). I.e. the government balance sheet (ex the central bank) now includes non-government assets supported by an equity position on the right hand side. This is the canonical example of something that I’ve argued elsewhere, particularly with occasional Mosler commenter “Winterspeak”. I.e. taxation is a flow that produces government equity at the margin. Equity of course is a balance sheet representation of saving, which is exactly what I’m arguing happens in this example. This type of equity is the pure right hand balance sheet type, in this case not represented by an equity financial claim, as is the case with a corporate entity. It is more comparable to household equity as a representation of cumulative net saving. (In both cases, equity can be marked to market at one’s choosing, where cumulative net saving undergoes an additional valuation adjustment. But this is just a detail for purpose here.)The government in this example has saved. It has a surplus flow in the form of taxes, equivalent to a corresponding reduction in discretionary income (and saving) for the non-government sector. It has saved. And I’ve shown that it shows up as equity or accumulate saving in the proper economic balance sheet sense. There is absolutely no question about it. Such government saving is an operational possibility just as legitimate as any of the operational possibilities you suggest in order to make your case in other areas.This government surplus position creates a net non-government deficit in the sense of the Kansas City sector financial balances model. The SFB model is defined relative to netting out investment from the non-government sector balance sheet. So the government surplus in this case serves as an offset and partial match for investment, equivalent to the shortfall in non-government saving. (I’m afraid to use the word “funding” here, for fear of being excoriated for false causality. That’s another unfortunate perception problem I won’t get into here – the idea that words previously associated with an improper operational model retain a patina of ineptitude if not criminality when used in association with the correct operational model.) That partial offset to investment again proves the existence of saving.A red herring threatens beneath all this. It doesn’t matter at all that the government acquisition in this case is a stock (i.e. existing asset) as opposed to a flow (i.e. real GDP component) purchase. I.e. it doesn’t matter that it is simply an exchange of newly created money (or bonds asset) for an existing real or financial asset. All that matters is that I have created the capacity for a government balance sheet equity position, and I’ve even done so by remaining “in paradigm”. I.e. The acquisition of assets has created its own (money) finance, and taxation has withdrawn money and reserves from the system, in the process creating the actual equity position. And finally we can ignore from an economic perspective the fact that governments tend to misclassify outlays as between expenditures and investments or financial assets. Such misclassification is a non-issue in terms of the true economics, and the true identification of government saving or dissaving. Moreover, all this has absolutely nothing to do operationally with the fact that the government issues its own currency when it spends. To be sure, the issuance of currency allows expenditures and deficits to be offset operationally with money creation. But money creation doesn’t require deficits. Just look at my example again where the central bank creates money by acquiring non-government assets and the government acquires additional non-government assets in generating an ultimate surplus. Similarly, when the government runs a budget surplus and pays down pre-existing debt (representing cumulative prior deficits), it saves. This is no less saving than if somebody in the non-government sector uses their saving from income to pay down a credit card balance. The fact that somebody has a net liability position has nothing to do with whether or not it’s possible for them operationally to save. The fact that governments tend to run chronic net liability positions similarly has nothing to do with their operational capacity to save.From a policy perspective, that saving affects a governments ability to borrow in the future. There is less debt on the balance sheet, and less debt servicing interest costs. Obviously this isn’t the case from an operational perspective, which is your ongoing point.“There is no storage shed in Canberra or Washington or anywhere else where the surpluses are saved up and available for the government to drive a truck down and pick up some dollars to spend.”Neither is there when I save to pay down my credit card debt. This example embodies a consistent distinction between stocks and flows. Saving is a positive flow. Nothing about starting with a negative stock disproves the capacity for a positive flow.“Surpluses destroy financial assets that were previously in the hands of the non-government sector and these assets are gone forever.”(With all due respect) so what? The same goes for my credit card company when I save to pay down my balance. Is this an operational point, a policy point, both, or neither? It appears to be a truism operationally, and from a policy perspective what’s the problem with paying down a little debt once in a while? And from a policy perspective, where’s the logical and mathematical dividing line between running a deficit that is less than infinity and running one that is occasionally less than zero? Who made up that rule and exactly what is it?“Surpluses take money from the pockets of the households because the government spends less than they tax us.”Absolutely that’s what taxes do. I put the same sort of question as with the previous example.That’s it for now!(I’d like to tackle the question of national saving another time, because I happen to disagree vehemently with the usual rejection of this idea in the context of the modern system. But that’s for another time, should you care.)

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