Modern Monetary Theory (MMT) makes clear that the spending of a currency-issuing government necessarily precedes tax payments and bond sales to non-government. This has important implications. It means that a currency-issuing government does not – and cannot – require revenue prior to spending. It means that it is government spending that makes possible the payment of taxes and non-government purchase of bonds, not the other way round. And it means that when a government requires itself to match deficits with bond sales to non-government, it does so voluntarily, and on terms that are entirely at its discretion. In short, the constraints on a currency-issuing government are not financial in nature. The constraints on the spending of a currency-issuing government are properly understood in terms of real resources and the capacity of the economy to meet demand for higher output at stable prices. A currency-issuing government always has the capacity to purchase whatever is for sale in the currency of issue (which, of course, is not the same thing as saying that government should always do this). Yet, the manner in which fiscal and monetary operations are usually conducted can create an appearance that things are somehow otherwise. So, why is it that government spending necessarily comes first? In view of its implications, this is an important matter to grasp.
Policy responses to the COVID-19 pandemic, much like policy responses to the global financial crisis and Great Recession of a decade ago, carry a couple of clear macroeconomic lessons for anyone who cares to learn them:
1. A currency-issuing government faces no revenue constraint.
2. A currency-issuing government dictates the terms on which it issues debt.
It is not only electorates that, understandably, have been slow to appreciate these aspects of reality. Plenty of economists, perhaps with less excuse, also exhibit little understanding. The lessons had better be learned fast, or austerity will be applied once the situation attenuates on the spurious grounds of “paying for” the fiscal deficits of the present period. While fiscal restraint, in some measure, may turn out to be appropriate, depending on the presence or absence of inflationary pressures, “paying for” past deficits can never be a legitimate justification for a tightening of fiscal policy.
A national government with the authority to tax gets to nominate a money of account along with the ‘money things’ that will be accepted in fulfillment of the tax obligations it imposes. In doing so, the government creates a demand for a particular money – a ‘state money’. This motivates the formation of markets for goods and services whose prices are denominated specifically in the money of account. This is true whether the national government with the authority to tax is a monetary sovereign (a currency issuer) or a monetary non-sovereign (a currency user), though a monetary sovereign will have greater autonomy in shaping the economy according to democratically expressed preferences as well as the wherewithal to underwrite the economy.
In some earlier posts, a job guarantee is added to an otherwise condensed income-expenditure model. This enables comparisons of steady states under different scenarios akin to the typical exercises conducted in introductory macroeconomics courses. What follows is a summary of the model, bringing together aspects that are dealt with in greater depth – but disparately – elsewhere on the blog, along with brief indications of how the model can be extended to include simple dynamics and short-run price behavior. Links to fuller explanations of various concepts are provided along the way.
Politicians often tell us that we should live within our means. True enough. Unfortunately, many of them do not appear to understand what this actually entails when it comes to fiscal policy. So far as most economists are concerned, the events of the last decade have thoroughly discredited advocates of austerity. Yet, it remains quite common to hear politicians from across the political spectrum calling for reductions in fiscal deficits or even fiscal surpluses. There appears to be little awareness that, in most countries, a call for a fiscal surplus is, literally, a call for the society to live beyond its means.
Neoclassical economics, which remains the prevailing orthodoxy, emerged in the late nineteenth century in the context of rising working-class opposition to capitalism. The theory’s appeal in certain circles as an apologetic for the status quo probably assisted its rise to prominence, which is not to imply that this was necessarily a motivation of the neoclassical economists themselves. The rise of any economic theory requires a receptive audience. Classical political economy had not provided defenders of the system with a comparable apologetic. Not only had it informed Marx’s analysis of capitalism but there were socialist movements drawing on interpretations of Ricardo’s labor theory of value. Class was central to the understanding of capitalism in both classical political economy and Marx, and no attempt had been made to conceal the class antagonisms characterizing the system.
This post concerns an implication of Marx’s treatment of productivity and labor complexity for the appropriateness of alternative processes of wage determination. For simplicity, it is assumed that all activity is productive in Marx’s sense (that is, productive of surplus value) and that conditions are competitive in the Marxian (and classical) sense that investment is free to flow in and out of sectors in search of the highest return. Introducing unproductive labor, including a substantial role for public sector and not-for-profit activity, and non-competitive elements would considerably complicate the analysis. The point of the exercise is to consider the incentive effects of alternative wage-determination procedures, from the perspective of Marx’s theory. It is suggested that Marx’s distinction between abstract and concrete labor implies that centralized wage determination, more than alternative wage-setting approaches, will be conducive to productivity growth.
There are often attempts in the west to depict China as capitalist rather than socialist. After decades of China going from strength to strength on macroeconomic criteria – and in view of its undeniable achievement in reducing poverty at a rate unmatched in recorded human history – some on the right wish to deny that this could have been accomplished through socialism and so instead claim China to be capitalist. At the same time, there are those on the left who wish to distance notions of socialism from China’s economic system and especially its record on human rights.
The previous part of the series introduced a short-run relationship between prices and output, P(Y), that is in keeping with a Kaleckian or Keynesian understanding of demand-led economies. According to this view, within the economy’s capacity limits, output reflects demand while prices reflect cost. So long as supply conditions remain unaltered, variations in demand are met with variations in production at stable prices. But when spending goes beyond the economy’s current capacity to respond in quantity terms, price pressures emerge from the demand side.
So far, in considering a simplified economy with a job guarantee, the focus has been on the demand-determined behavior of output and employment. Prices, in this exercise, have simply been taken as given on the grounds that they are not causally significant in the process. This approach does not require prices to remain constant, although, for given supply conditions, they may well do so over a fairly wide range of output for reasons to be discussed. Nor does it require that prices are necessarily unrelated to output; only that the direction of causation in any aggregate relationship between the two mostly runs from output to prices rather than the other way round. But once attention turns to the issue of price stability, which is of considerable interest to job-guarantee proponents, it becomes relevant to entertain a possible short-run relationship between output and prices. This will provide a basis for identifying potentially price-stabilizing aspects of a job guarantee in the next part of the series.