In explaining why it is investment that creates saving, and not the other way around, different economists have offered different ways of looking at the matter. Keynes (see previous posts here and here) distinguished planned (ex ante) from actual (ex post) investment and saving to note the way in which planned saving adjusts to planned investment via changes in income. Kalecki (discussed previously here) emphasized the initiating role of decision making. Firms can decide how much to invest, but not how much profit they will make, because profit depends on the spending decisions of others. Post Keynesian analysis of institutions and monetary operations suggests an explanation summed up with characteristic insight and clarity by Warren Mosler in the short video embedded below. The purpose of the present post is just to flesh out the explanation a little and highlight a few of its implications.
Three previous posts (here, here and here) outlined the operational differences and similar macro effects of some alternative approaches to government spending; namely, bond issuance to the private sector, interest on reserves, and overt monetary financing. Since these posts were quite detailed, it might be worth spelling out the short answer to what is going on in each case. Further details can then be found in the earlier posts.
As discussed in the previous post, the net impact on balance sheets of the various approaches to government spending – (A) overt monetary financing, (B) sale of bonds to the private sector and (C) interest on reserves – is the same. There is a direct and immediate increase in net financial assets held by non-government as well as a creation of income. Both effects are equal in size to the amount of government spending. But in the case of method B, these effects are achieved in an inefficient and convoluted way that obscures the origin of government money, which in reality is created through the act of government spending or lending rather than being “borrowed” from the private sector. Even so, in outdated textbooks, the practice of auctioning bonds to the private sector has often been rationalized on the supposed grounds that methods A and C are more expansionary in their demand effects than method B, and so are claimed to carry a greater inflation risk. In truth, there is no difference between the three methods when it comes to the expansionary impact or inflation risk of government spending. There is a different effect on the composition of net financial assets, but no difference in the private sector’s enhanced capacity to spend or the demand effects of the government spending.
Government spending has two immediate and direct macro effects. It:
- adds to the net financial assets held by non-government;
- creates income equal to the amount spent.
This is the case whether the central bank is (A) permitted to purchase government bonds directly from the fiscal authority (‘overt monetary financing’) or instead (B) is required to buy them from the private sector (currently the procedure under “normal” circumstances in many countries). It is also true if (C) the government simply spends without issuing bonds and pays its policy rate (which can be zero) on reserve balances.
The term ‘neoliberalism’ refers to an economic program of deregulation, privatization, trade liberalization, corporatization and small government – a project to subject more and more economic activity to the whims of “the market”. At its core, neoliberalism is an attempt to make profitability the governing principle in all economic calculation. For this neoliberal aspiration to be approximated in reality, government must behave as if it is just another market participant. It must pretend to be subject to the same financial constraints as private corporations and to share their need for revenue. It requires maintaining the pretense that government has no capacity to act independently of markets; that there is no capacity for autonomous social action independent of markets; in fact, that there is no such thing as society. In short, obey the market, because there is no alternative. We are powerless to stand in its way. Or so the superstition goes.
It is quite common to hear that “we should not live beyond our means”. Well, in Australia, we have just voted to do so. Our most recent vote says, “we need to live beyond our means so that the government sector can move into surplus”. The LNP promises to balance the budget or put it into surplus by 2020. This means a vote for the LNP was a vote to be living beyond our means by 2020. Likewise, the ALP promised to balance the budget or put it into surplus by 2020. A vote for the ALP was equally a vote to be living beyond our means by 2020. The Greens adhere in their constitution to a principle of balancing the budget on average over the business cycle. A vote for the Greens was therefore a vote to live beyond our means on average. Taken together, these three parties attracted about 87 percent of first-preference votes. So, at the very least, 87 percent of us have voted for the country to live beyond its means, no later than 2020.
The following is a video featuring Bill Black and Stephanie Kelton speaking to activists at the People’s Summit in Chicago, June 17-19. Bill discusses banking and financial fraud. Stephanie debunks the misleading “government as household” analogy and emphasizes resources, not money, as the constraint on a currency-issuing government.
J.D. Alt has put together an accessible video explaining fiat money, intended for a general audience. (Hat tip to jrbarch in the comments.) For additional background, comments and links see J.D’s post at New Economic Perspectives.
Note: Content-wise the video is very good apart from a minor quibble. (See the first comment.)
“Lerner’s argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.” (Keynes to Meade, April 1943)
“The need to balance the budget is superstition … a myth. It’s like a religious doctrine that is used to get people to believe a certain thing.” (Paul Samuelson)
Election time serves as a reminder of how difficult it is to break through the popular illusions clouding public debate. Try as we might – and this goes for anyone seeking to dispel prevailing neoliberal dogmas – the public perception, if it budges at all, appears to do so painfully slowly.
A global search to uncover the World’s Biggest Idiots has succeeded almost before beginning. It’s barely dawn as these words are written and, already, it is mission accomplished! Take a bow, Australians, with a special nod to three thousand Herald Sun readers. The extent of our idiocy leaves the rest of the world not completely in the shade, yet somewhat humbled.