Friday, April 27, 2012

Three MMTers and Milton Friedman say government borrowing is pointless.

The plonkers running Western economies have for the most part not grasped the distinction between micro and macroeconomics: in particular they think government, plus government income, spending and borrowing can be treated the same way as a household’s income, spending and borrowing.

In fact the two are as similar as chalk and cheese. (Incidentally, I’ll use the word “government” in the sense “government and central bank combined”).

Micro and macro borrowing.

Borrowing can make good sense for a microeconomic entity, like a household or business. For example, where such an entity wants to make an investment that makes sense, and the entity does not have enough cash, it will borrow. Nothing wrong with that.

However a country that issues its own currency (a “monetarily sovereign” country / government), is totally different. This “entity” has a limitless supply of cash: it can print the stuff. Borrowing is totally pointless. (Same goes for the Eurozone as a whole – though INDIVIDUAL COUNTRIES within the EZ are a different kettle of fish.)

New Economic Perspectives and Friedman.

The New Economics Perspectives site has just published an article by Dan Kervick (who I regard as very clued up) arguing that government borrowing is pointless. This argument is not new, but it’s good to see someone joining the “borrowing is pointless” chorus.

Milton Friedman in 1948 argued for a zero government borrowing regime. See paragraph starting “Under the proposal…” (p.250) here.

Friedman’s arguments were, first, that borrowing might be justified in war time when government spending relative to GDP is very high, and collecting very large amounts of tax might be impractical. However, so argues Friedman, this point is invalid in peace time, ergo borrowing is not justified in peace time.

Second, Friedman debunks the argument that borrowing is justified because, in his words, it is “less deflationary” than getting a similar amount of money via tax. As he rightly points out, simply printing money is even less deflationary.

Warren Mosler

Warren Mosler also argues for a zero borrowing regime. See second last paragraph here.

He does not give any detailed reasons, far as I can see. He says that “No public purpose is served by the issuance of Treasury securities with a non-convertible currency and floating exchange rate.” That is true, but that simple statement needs bolstering with some more detailed arguments, which I attempted to set out in a paper entitled “Government borrowing is near pointless”.

My Reasons

It is not possible to accurately summarise all the arguments in the latter paper. But briefly the main arguments are thus.

1. A popular argument for borrowing is the Keynsian “borrow and spend with a view to stimulus” argument. However, Keynes himself pointed out that printing money was a perfectly good alternative to borrowing it. But even that is too charitable an attitude towards borrowing. Reason is thus.

Where a government issues its own currency and borrows units of its currency, it is borrowing something which it can create itself in limitless quantities: similar to, and as pointless as a dairy farmer buying milk in a shop.

2. There is borrowing with a view to the purchase of assets, like infrastructure investments. One flaw in that argument is that infrastructure investment spending is small compared to total government spending, thus such spending can perfectly well come out of income.

Another possible excuse for borrowing to fund infrastructure is that the borrowing spreads the cost over the generations that benefit from such spending. That argument is nonsense because it is just not physically possible to consume real resources like concrete or steel produced in 2030 to construct roads and bridges in 2012.

3. Government borrowing smooths out the erratic timing of government expenditure and income from taxation? Sorry: just another flawed argument.

To illustrate, if all corporation tax is paid in January, government will on the face of it be short of funds towards the end of each year, which for “borrow” enthusiasts means government will have to borrow.

Not true: suppose the government just prints money towards the end of the year, would that be inflationary? The answer is “no”, because corporations know perfectly well that a significant chunk of their cash is going to disappear in January. That money is not “spendable” money. In fact the deflationary effect of abstaining from spending that money will pretty much cancel out any inflationary effect of government printing and spending money late in the year.

4. Given the hopeless arguments for government borrowing, what are the REAL REASONS for such borrowing? Well, the real reason is moral hazard, skulduggery, corruption - call it what you will.

To be specific, voters attribute tax increases to governments and politicians to a far greater extent than they attribute interest rate rises to governments and politicians. Thus it always pays incumbent politicians to run up national debts, and leave the consequent mess to their successors to sort out. 

And finally.

So if three MMTers (Warren Mosler, Dan Kervick and me) all say the same, namely that government borrowing is pointless – not to mention Milton Friedman - I challenge anyone to contradict us!!!!


P.S. (28th April). Another MMTer with similar views is Bill Mitchell. He said, “A sovereign government within a fiat currency system does not have to issue any debt and could run continuous budget deficits (that is, forever) with a zero public debt.”

H/t to “Peter” on the New Economics Perspectives site.


No comments:

Post a Comment