One of the most damaging misconceptions in the public policy debate is the likening of the government budget to that of a household. In a modern monetary system – i.e. one involving a flexible exchange-rate fiat currency – the analogy is inapplicable. Private households and firms are financially constrained. They must earn, borrow or otherwise obtain currency before they can spend it. The government, in contrast, is not financially constrained. It faces resource and political limits, but not revenue constraints other than those voluntarily self-imposed.
This point is well recognized by MMT economists. For instance, here is a good article on the topic by Randall Wray. However, the myth is a stubborn one, so I thought it might be worth reiterating the point. I was prompted to do so after reading a post on a private message forum. I think the post is interesting as an illustration of the understandable but faulty reasoning to which many succumb. On one level, it sounds so “reasonable”, yet it is false and utterly counterproductive. It is reasoning that causes many unwittingly to vote against their own interests.
We often hear the comparison of family budgets to the federal budget. When you consider the amount of private debt in this country, it seems clear to me that our government is doing on a large scale what its constituents have been doing on a smaller scale. Most of us seem to be head over heels in debt, and now the government is falling into the same trap.
There is no awareness in this comment that the dependency of the non-government sector on private debt was exacerbated by fiscal austerity in the lead up to the crisis. As a matter of accounting:
Government Deficit = Non-government Surplus
The non-government sector cannot be in surplus (earn more than it spends) unless the government is in deficit (spends more than it taxes). If the government reduces its budget deficit, non-government net saving is reduced by the same amount. For a more in-depth discussion of this accounting identity, see Budget Deficits and Net Private Saving.
When the government runs a budget surplus, the non-government sector is forced to run down its net savings dollar for dollar. In the article linked to above, Randall Wray points out that in the case of the US, every time the government has run a succession of budget surpluses, recession or depression has followed very soon after. It has happened seven times in the nation’s history.
Eventually, the fiscal austerity means that growth can only be maintained through the unsustainable accumulation of private debt. Private debt matters because private households and firms, as users of the currency, are financially constrained. Government, as the issuer of the currency, faces no financial constraint. It makes little sense to push the financially constrained non-government increasingly into debt just so the financially unconstrained government can avoid going into “debt”.
The poster continued:
My wife and I made the decision years ago to get out of the never-ending death spiral of personal debt and we’ve been quite happy with that decision ever since.
I share the feelings of the poster on this point. Others may feel differently. It is a position that is not dictated by MMT. But, to me, private debt spells dependency. However, the reason it does so is that, unlike the government, we are financially constrained. We can’t just create fiat money for ourselves out of thin air. If we could, I doubt we’d bother to pretend we were going into “debt” to pay for things.
I also think the attitude of the poster and his wife, to the extent that it involves a retreat from materialistic aspirations, is a sensible one in terms of environmental sustainability. I discussed my perspective on this issue in a previous post. Again, political choices such as this are not dictated by MMT, which is open on such matters, but personally I think that as a society we need to develop a deeper interest in environmentally sustainable activities. There is endless scope for intellectual, scientific, artistic, physical, sporting, social, spiritual, recreational, etc., activities that are more consistent with environmentally sustainable living than a narrow pursuit of material possessions. Our economic activities could be based more on such non-material pursuits.
But then the poster goes on to contrast his household’s choice to avoid dependency on private debt with what he sees as irresponsible government behavior:
I don’t think our politicians are capable of making the same decision on debt, regardless of their party affiliation.
In view of the accounting fact that the government deficit equals the non-government surplus, it would clearly be counterproductive for government to make the same decision as the poster’s household. If the government is determined to be in surplus, then in aggregate, and by definition, the rest of us have to be in deficit, whether we like it or not.
If, on the contrary, we decide in aggregate that we want to net save, and the government doesn’t fight this decision, the result will be income adjustments that put the government’s budget into deficit to the extent of our desired net saving.
And this latter approach to fiscal policy would be the appropriate one. Budget deficits are not a problem for governments in modern monetary systems when they are consistent with non-government net saving intentions at full-capacity output.