No, don’t worry, this is not a religious lesson. The relevance of the post title – drawn from Luke 6:38 – is the causation it implies between autonomous action and induced behavior. I have been reflecting on the current state of macroeconomic policy in which a purported commitment – a nonsensical one – to reduce the public “debt”-to-GDP ratio exposes an upside-down or back-to-front view of reality that is evidently widespread. The austerians exploit this confusion for their own class-interested ends, a point that Rodger Malcolm Mitchell has tenaciously and effectively hammered away at for some time now (for example, here). These class-interested ends include the breaking of organized labor, dissembling of the welfare state, and the intentional widening of the wealth gap between the 0.1% and the rest of us.
“Give” — autonomously, exogenously, without regard to a particular reward in return — and this act, we are told, will tend to induce a behavioral response from others that is conducive to our own well-being. “Forgive” — without first having been forgiven — and we “will be forgiven”. Our own attitude of forgiveness, non-contingent on the reciprocity of others, will nonetheless tend to induce an attitude of forgiveness in others. Likewise, rather than waiting for the world to conform to our ideal, “do to others” as we “would have them do” to us, and we will help to bring that ideal into existence.
It is the same in a monetary economy. From inception, the currency issuer must exogenously create money (spend or lend) before taxes can be paid. The currency issuer is in no need of outside funding and the notion that it can “save” or be burdened by “debt” in its own unit of account is nonsensical. If the currency issuer waited for the revenues it desired before first bringing them into existence, it would be waiting a long time.
Similarly, the issuer of private bank money must issue a loan before it can receive interest income in return. Private banks are not constrained in their lending by the possession of prior reserves. If they are adequately capitalized and perceive prospect of gain, they will issue a loan and simultaneously create a deposit. Any shortfall in reserves can always be made up either through interbank lending or by borrowing from the central bank. What matters to banks in this decision is the prospective flow of interest payments in relation to risk and the price of redressing any shortfall in reserves.
In the real economy, investment initiates production and generates income, before which nothing in real terms can be consumed or saved. Just as, according to Galations 6:7, we reap what we sow, the autonomous act of investment and production (sowing) brings forth income (a harvest), some of which can be put aside or saved.
Nature, too, follows this pattern. The earth gives and this tends to create the conditions for its own reproduction, the destructive tendencies of humanity notwithstanding.
It is true of art, music, film and literature, if viewed from the standpoint of creation (production) and appreciation (consumption). The artist takes a conscious decision to create, inducing a reaction in the audience. Their can be no coherent audience reaction before the work of art is exhibited. The musician composes and performs, generating feelings in the listener. A filmmaker executes a vision and a writer expounds upon a worldview in an attempt to connect with others and evoke an emotional response. The reception of a work of art, music, film or literature reacts back upon its creator, certainly, influencing future work. But there is a pause in the process unless the creator takes an autonomous decision to give birth to a new creation, just as there is a pause in the monetary circuit if there is an interruption in money creation.
The independent action (to create, invest, autonomously spend) induces a set of responses (to engage, consume, save).
The illogic of austerity runs entirely counter to the causation found in the monetary sphere, the real economy, nature, the arts, and scripture. The correct response to dwindling production and employment, the merchants of deficit hysteria tell us, is to hike tax rates, the effectiveness of which depends on income, while taking an axe to government spending, upon which income partly depends.
The austerians get the causality precisely wrong. Income (the harvest) is endogenous, induced by autonomous decisions to invest and produce (sow). Income has no independent existence and cannot arise of its own accord. It is dependent on a prior decision to initiate production, an action that is enabled through money creation (government spending/lending or private bank lending) or a decision to invest independently of current income out of retained earnings. In a depressed economy, where private credit creation and investment dry up, deficit expenditure is the only sure way to set the economy back on a path to recovery.
Similarly, the austerians tell us that the way to reduce the public debt/GDP ratio is to focus directly on the public debt (the numerator of the ratio) through cuts to government spending and tax hikes. But this results in stagnation or even an endogenous decline in GDP (the denominator of the ratio). The result, in all likelihood, will be a rise in the public debt-to-GDP ratio, not to mention horrendously high unemployment and immense suffering for many people. This has indeed been the experience in the current crisis, as Bill Mitchell’s most recent post highlights.
The austerians claim, of course, that cuts to government spending will either encourage private investment or, through declining unit labor costs, generate additional net exports. Neither of these claims are credible.
The notion that weak economic activity will be conducive to private investment is fanciful. Firms that are already facing weak product demand and excess capacity are hardly likely to respond by expanding capacity further, no matter how large are the money hoards they currently possess.
The hope of export-led recovery is not a global solution, and is really just code for an attack on workers in the name of “international competitiveness”. The result is a race to the bottom on wages, working conditions, the social safety net, and public services.
The inevitable outcome of this focus on public debt rather than output and employment is a stagnation or decline in GDP that offsets or more than offsets the effects on the public debt-to-GDP ratio of the austerians’ pro-cyclical fiscal measures.
The truth is, we can have sustainable economic recovery the moment we put our collective foot down and insist upon the appropriate government policy response to the current situation. But recovery will only be brought about by getting the causation right. Focus has to be on what is directly controllable in a democracy: the government’s fiscal response – both its level and composition – rather than waiting and hoping for favorable changes in the behavior of the 0.1% to bring about our economic salvation.
Create, through autonomous action, the conditions conducive to the kind of behavior we wish to see and be a part of – productive investment, innovation, creativity, production – and the desired behavioral response will be forthcoming. Income, saving, tax revenue, even a stabilization of the public-debt-to-GDP ratio, as if it mattered, will follow.