It Doesn’t Have To Be This Way

Most economies around the world have been in the doldrums since the Global Financial Crisis of 2007/8 and the Great Recession that followed. Unemployment in some European nations has been at levels not seen since the Great Depression. Although the situation is not as dire in all nations, economic activity remains well below potential virtually everywhere. The result is needless human suffering.

The crisis undoubtedly had multiple causes, but the most obvious catalyst was excessive private debt, especially mortgage debt. For a decade or so leading up to the crisis, private spending exceeded income in many countries. As long as employment remained high, this was just about manageable. Unfortunately, once the crisis hit, many people lost their jobs. Debt commitments became difficult or impossible to meet. By necessity, many households cut back spending, trying to get private finances in order.

This, of course, caused another problem. A drop in customers is bad for business and private-sector employment. Unless another employer steps in to hire workers, or somebody “gifts” us more spending money, or a large customer appears on the scene to purchase output, the economic gloom and doom continues.

We Need Sustained Fiscal Expansion

There is really only one other employer capable of stepping up to the plate when the private sector is in the doldrums: the government. And there is really only one entity that can gift us extra spending money: the government. As far as large customers go, there are two that can partly take our place in the market. One is the government through public consumption and investment. The other is the “rest of the world”. Foreigners provide a market for our exports. This looks promising until it is realized that not every country can rely on export demand to trade themselves out of trouble. The exports of one country are the imports of another. For the world as a whole, there is no net impact on demand or employment.

The implication is clear:

When the private sector is unable or unwilling to spend, the only employer, bearer of gifts or reliable large customer waiting in the wings is government.

Unfortunately, most national governments have been reluctant to implement the spending measures and tax cuts – expansionary fiscal policy – needed to rebuild the economy. Initially, some governments did respond positively, though not to the extent required or for long enough. But, before long, members of the powerful “1 percent” – in reality, the 0.01 percent – and their mouthpieces in the media were actively and openly opposing the policies. They made a series of claims that have since proved to be false. We were told that budget deficits would drive up interest rates. We were told that inflation would run rampant. We were told that our children and grandchildren would be weighed down by crippling public debt. We were told that doing the opposite of what is required – referred to as ‘austerity’ – would boost business confidence and lead to higher private spending. None of these claims were true.

Why Do the 1 Percent Oppose Sensible Fiscal Policy?

It is not always entirely clear whether opposition to sound fiscal policy is due to vested interests or ignorance. One possibility, sometimes voiced, is that the 1 percent believe they benefit from high unemployment. When unemployment is high, those of us still with jobs have very little bargaining power over pay and conditions. It is easier for employers to replace one of us with another when many remain jobless and desperate for any position at all. This makes it hard to win pay increases. In real terms, meaning once inflation has been taken into account, pay levels can even decrease. This is not a new story. For much of the past forty years, known as the ‘neoliberal’ era, government policy has been used to keep unemployment high by historical standards. Real pay levels for most of us have barely risen since the mid-1970s. Material living standards for the majority have improved mainly because there are now a lot more two-income households.

While vested interests may be part of the story, ignorance is probably also at play. Contrary to a common misconception, a reduction in workers’ pay does not automatically translate into higher levels of production. To do so, somebody has to take up the slack in demand caused by the weaker consumption of underpaid workers. Otherwise, businesses will find there are less customers for their products. Either government, foreigners or businesses themselves need to pick up their spending to drive stronger economic activity. Theory and experience both indicate that this is not automatic. It is quite possible for demand simply to remain weak, and economic activity not to revive, despite lower pay for workers.

Even so, it could be argued that the wealthiest individuals and largest corporations do not necessarily mind production stagnating if their share of the pie increases. Recession causes many smaller and mid-sized companies to go bankrupt. The result tends to be a concentration of profit income in the hands of the most powerful corporations and their financial backers. In this way, the financial interests of the 1 percent may actually be served by austerity, even though it hurts the rest of us.

It’s Time to Take the Initiative

Ultimately, it doesn’t really matter whether the bad policy decisions are due to ignorance or bad motives. Either way, the result is pointless suffering. The way out of this is for the rest of us – the 99.99 percent – to recognize what is going on and exert our own political pressure on governments. We have to prompt them to act responsibly on our behalf.

But this might be thought to raise another question. Even if we do have the political will to bring about meaningful changes in government policy, are the desired policies actually feasible? Can the government really afford to spend more money into the economy? Can it really afford to cut taxes on middle and low-income households? Won’t this create problems down the track?

Given the tenor of the policy debate in most countries, it is entirely understandable that many people would wonder about these and similar questions. We are subjected constantly to threatening talk by politicians and media personalities about budget deficits and public debt. Budget surpluses, or at least balanced budgets, are touted as fiscally responsible, whereas deficits are painted as irresponsible. In reality, there is nothing inherently responsible in balancing the budget. To the contrary, at a time of high unemployment, efforts to balance the budget are the height of irresponsibility.

Here is a simple but important truth:

Most national governments can never run out of money. As currency issuers, they are the original sources of the money they spend.

Member nations of the European Monetary Union are an important exception. Governments of these nations are users of a common currency, the euro, rather than issuers of their own currencies. They cannot simply issue currency as desired. Even here, though, the European Central Bank, as currency issuer, cannot run out of euros and will always be able to play backstop.

It is also important to recognize the limitations of local and state governments, who are mere users, not issuers, of the national currency. But here, also, currency-issuing central governments always have the capacity to fund lower levels of government.

The fact that a currency issuer can never run out of its own money does not mean that any level or type of government spending is okay. But it does mean fiscal policy should be thought about in a different way than many politicians and journalists would have us believe. Above all, it means that real resources are the only hard constraint on government spending. Political constraints also come into play. But money should never be considered an obstacle.

Take a moment to reflect on the present situation in many parts of the world. Governments are cutting back social services supposedly on the grounds that they are “unaffordable”. To take just one small example, imagine a government that reduces opening hours of public libraries in a supposed attempt to “save” money. What possible purpose could this serve other than the unnecessary hardship of laid off library staff and a less informed public? Is there a shortage of librarians? No. Is there a shortage of books, shelf space, reading areas or computers? No more so than before the cutbacks. So how could it be “unaffordable” to provide normal library services? There are librarians willing to work. There are books that could be read and computers sitting idle. Yet, we are asked to believe that in such a case it is somehow impossible to keep the social service operating normally. The government has supposedly “run out of money” it alone can create. The very idea is senseless.

The same goes for infrastructure such as roads, public transport systems or utilities. Is there a shortage of engineers and trades people? Not at all. They are more available now than before the crisis. The same goes for schools, universities and technical colleges. Is there a shortage of teachers? Fewer students wanting to receive an education or learn a trade? A problem of vanishing school buildings and facilities? No more so than before the cutbacks. The same goes for hospitals. Are there shortages of doctors, nurses and healthcare administrators? Patients? Hospital equipment? No. And the list goes on.

For Government, Resources Are the True Constraint, Not Money

If machines and plant are lying idle, workers are unemployed and raw materials are available on the market, there is nothing to stop us putting them to good use. Stated simply:

A currency-issuing government can always afford to buy whatever is for sale in its own currency.

Wherever there are idle resources, a currency-issuing government has the capacity to pay for their continued use. Whenever some of us cannot find a job or obtain as much paid work as we want, the government always has the capacity to hire us. If our spending is too low to sustain normal levels of demand for consumer items, it is always possible for the government to provide us with extra spending money through appropriate ‘transfer payments’. These may take the form of additional family allowances, unemployment benefits, pensions or a flat cash payment (or series of payments) to all taxpayers. All such actions would help to maintain demand, production levels and employment.


6 thoughts on “It Doesn’t Have To Be This Way

  1. Peter, this sounds suspiciously similar to pump-priming. A strategy that was pursued during the ’09-’12 period, resulting in all gains (not an exaggeration) going to the top 1-3% as median household incomes fell. Even as fiscal policy drastically pulled back in the last couple years, the results are largely the same at the aggregate level.

    Here’s a short list of what the economy is not currently lacking: Corp profits or historic stock market gains. Or stock buybacks. Or dividend payouts. Or CEO pay. Or student loan debt. Or subprime auto loans. Or junk-bond trading. Or complaints about hyperinflation in the price of Picassos. Or urinals (as art) selling for $1M a pop. Or soaring inequality. All of which are at record levels.

    It seems to me that regardless of the activist fiscal policy stance, it doesn’t seem to matter much in terms of reversing the declining living standards of working families. So do you think you may be missing something? Now at this point, I suspect you will quote yourself as having used certain words that act as escape hatches. What I’m looking for is specific policy backed by high-level numbers, to include distributional effects.

    So far, I’ve seen one attempt. While it didn’t include distributional effects, it was at least an attempt. And a noble one at that: Embark on a multi-trillion dollar spending program (because currency issuer!) and if inflation gets too high, just stop. If inflation subsequently subsides, then just start again.

    Great start! Got anything else to add?

  2. I was doing just fine with this until we got to “Most national governments can never run out of money. As currency issuers, they are the original sources of the money they spend” which I believe – as the UK parliament has been finding out today – is presently incorrect, no? (many sources have stated that up to 97% of money created is in the form of loans by private banks, i.e. debt)

  3. The money the government spends is its money (currency and reserves), which it alone issues. The money issued by banks is in the form of private bank deposits that are convertible at par to the government’s currency. Government spending is done by crediting reserve accounts (government money). Tax settlement is done by debiting reserve accounts (government money). Depositors at private banks can demand government money (currency) which banks obtain from government. And banks need government money (reserves) for settlement purposes.

    Strictly speaking, I should avoid using the term money at all, and stick to specific terms (currency, reserves, deposits, etc). But this is intended as a beginner-level post, and I don’t think the distinctions really would have added much in this context. For instance, the passage you quoted from the post says nothing about the proportions of government and bank money. It simply indicates that most national governments create the money they spend, and can do so to the extent necessary. That is true, and all that is needed for understanding the post.

  4. Trixie, I don’t disagree on distribution. (My proposal for an interim society prior to utopia, for example, would result in very little inequality.) But the present post and a substantial proportion of others on this blog are, and will continue to be, concerned with what I see as the main (economic) deception holding people back — the misconception that financial “affordability” can be a problem for a currency-issuing government. I think people are pretty much in the dark on economic matters until they come to see this simple point. Once seen, it becomes obvious that many different policy approaches that might be thought impossible or impractical are actually entirely possible. The realization can be empowering, irrespective of a person’s ideology or politics.

    I don’t perceive there to be the same level of ignorance on distribution. Sure, many may not realize the extent of the inequality, and some may fall for “job creator” and “just deserts” type mythology used by the wealthy to defend extreme inequality, but I think most people do understand that you can moderate inequality through a combination of progressive taxes and transfers, a different composition of government spending, regulation of executive pay and even centralized wage determination (we had this in Australia for quite a while). Even with their misconceptions about affordability, I think most people still do understand that it is possible to reduce inequality. For whatever reason, they haven’t seemed particularly committed to voting for it or demanding it, but maybe we are beginning to see a change on this.

  5. Peter, what I’m sure you meant to say is that there aren’t any operational constraints. This “just ops” approach has consequences beyond how economists calculate inflation for consumer goods/services.

    And there is a high degree of ignorance surrounding the issue of distribution, in large part thanks to economists of all stripes. Because what people don’t really get is that all the fancy economic terms used to describe stagnation — ZLB, secular stagnation, global savings glut, global debt glut, lack of NFAs, shampoo cycle, liquidity trap, not enough cheap state jobs(!!!) — are all saying the same thing, without actually saying it. At least out loud. It’s the distribution (or lack thereof), stupid.

    There is no lack of “money” in the economy, no matter the definition or use of air quotes. In fact, we have the exact opposite problem via extreme imbalances. This is how the 0.1% advances — one bubble and bust at a time or the ever expanding Yacht Economy™ (when not in bust mode) — while everyone else falls further and further behind. If you think this is a great idea and what’s “empowering”, then just say so. But it’s certainly not an insight since it’s the way we’ve been operating the system for 30+ years now. Based, I might add, on very friendly MMT policies. Because, you know, what MORONS.

  6. Currently there is not enough spending to maintain strong aggregate levels of employment in many nations. The government can address that through its spending, which involves creation of government money. A currency-issuing government has that capacity.

    And there is not enough spending of the right kinds to ensure the right kinds of employment and distributed prosperity for all. A currency-issuing government can address that through a more appropriate composition of its spending. No matter how it composes that spending, it will involve creation of its money, which it has the capacity to do.

    And, yes, there is economic rent and super profits that could be taxed away without impacting negatively on employment. And we could have steeply progressive taxes. A currency-issuing government could introduce these measures without needing to fear bond vigilantes or investment strikes thanks to its capacity to do whatever it takes to maintain activity in important areas of the economy as well as ensure strong aggregate employment. To me, the key significance of currency sovereignty is not just about the capacity of the government to run ongoing deficits when appropriate but its capacity to pursue whatever is the political will (including far-reaching regulatory and systemic changes) even when this runs counter to the interests of the wealthy. (It would require, of course, the exertion of mass political pressure from below.) Personally, I think the intention to remove this latent democratic potential in currency-sovereign nations was a big part of the motive for the imposition of a common currency in the euro area. Historically, Europe has had much stronger labor movements than the US (and Australia), and the common currency is enabling the powers that be to weaken organized labor and undermine welfare states under the guise of a supposed need for austerity.

    Coming back to currency issuers, the different saving propensities of different income cohorts mean the government can get the same aggregate employment with less injection of net financial assets (NFA) by targeting much of its spending toward activities benefiting low and middle income households, rather than merely funneling NFA to the wealthy.

    This is partly why Modern Monetary Theory (MMT) supports a job guarantee. The mechanism would deliver true full employment irrespective of the level of NFA. It is a way of ensuring government spending is targeted where it is needed.

    And it is partly why none of the examples in my post involved merely transferring NFA to the wealthy but instead entailed such measures as maintaining library services, public infrastructure, hospitals, education and cash payments to families, retirees and the unemployed, and required employment of librarians, engineers, trades people, medical staff and educators. Many such workers and many more in other useful fields are underemployed or underpaid (with subsequent reduced multiplier effects elsewhere in the economy) due precisely to a lack of spending in those areas on the claimed grounds that austerity is necessary. Understanding currency sovereignty exposes that claim as incorrect.

    I am not at all opposed to a greater emphasis on reducing inequality and getting greater aggregate spending out of less NFA creation. In the “proposal” I linked to in my previous comment, which is not politically viable at present but gives an indication of my own preferences regarding distribution, the level of NFA would converge on zero at the end of every two-week period. There would effectively be no private saving at all. And, in basic form (though with scope for variability), there would be no inequality of income or nominal wealth. The only inequalities would be in terms of real factors, such as some people obtaining more attractive jobs than others or living in nicer locations and other differences of that nature. Even these inequalities could be progressively redressed over time if it happened to be the political will.

    But I am also cognizant of the likelihood that not everyone who comes across the blog will share my political perspective, or even be in the same ballpark, and I think the basic implication of currency sovereignty holds relevance for them too, because it is quite general. For this reason, often in posts I consider alternatives that are not necessarily egalitarian, including mechanisms such as a ‘job or income guarantee’ (JIG), or ways to distribute unearned income, or approaches to the reduction of aggregate labor time, and so on, that could allow widely varying degrees of inequality. Sometimes I just try to keep the discussion politically open, which may be appropriate when the point in focus is of general relevance, irrespective of a person’s politics.

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