EconoMonitor

Great Leap Forward

Obsolete Dogmas about Government Budgets are Killing Us

Sorry for the near-hiatus over the past weeks–I’ve been doing a lot of traveling.

Here’s a good post on the current sorry state of economic policy in the US and Europe: http://www.marketwatch.com/story/obsolete-dogmas-are-crippling-the-world-economy-2014-11-14?page=2

The author, Darrell Delamaide, gives a shout-out to MMT:

MMT, which bases models on the reality that the U.S. dollar is a fiat currency created out of thin air through government spending, represents a Ptolemaic revolution for flat-earth economists mired in an 18th-century view of the world.

Short of a full-fledged catastrophe overtaking us, however, neither the political establishment nor the public are ready for this radical a change…. In the meantime, we will continue to suffer the travesty of citizens in the two richest economies in the world, the U.S. and the EU, thrust into poverty, stress, and lower standards of living by bumbling politicians using obsolete paradigms for understanding how the world works.

In the piece, he (correctly) attributes the fiscal hawk position to wayward morality–as if there is something immoral about a government deficit. There is only one scientifically justifiable position on government budgets: Abba Lerner’s Functional Finance approach, or what is now called the Deficit Owl view. A government’s budget should be formulated with a view to achieve the public purpose. The ex post budgetary outcome–whether surplus, deficit, or balanced–should never be a goal and should never be a measure of success.

Sure, we need an ex ante budget to prioritize, to allocate real resources, and to hold project management accountable. In some cases, it might even make sense to loosely link government spending on some projects to certain tax sources (bridge building to gasoline taxes or tolls). But there is no sense in gauging government policy effectiveness against the difference between total government revenues and total government spending.

Foregoing needed infrastructure, healthcare, pensions, education, housing, policing, or┬ádefense on the pretense that a sovereign government “has run out of money” (as our President says all the time) is just plain stupid. If we have unemployed resources domestically (or can hire and purchase them from abroad) then we can “afford” to put them to use.

The deficit hawk–and dove–stupidity is literally killing people. These are entirely avoidable deaths.

One more link: http://blogs.wsj.com/moneybeat/2014/11/10/pow-zap-wham-get-ready-for-comic-book-economics/. Yep, a comic book to present Steve Keen’s economics. MMT also got a mention. I’ll let you judge whether that’s a good thing or not.

9 Responses to “Obsolete Dogmas about Government Budgets are Killing Us”

PZ_November 16th, 2014 at 12:57 pm

Why wont you ever say that eurozone needs some kind of reform, when it clearly needs it. Why won't you ever call for it?

L. Randall Wray L. Randall WrayNovember 17th, 2014 at 2:49 am

Uhhmm: PZ, who are you directing your comment to? I’ve been calling for “reform” of the EMU since the mid 1990s. Are you kidding or are you ignorant? Reform is not enough. Ideally the “periphery” (PIIGS) would band together and demand a make-over, or leave in unison. A currency “union” without fiscal “union” cannot possibly work. It was doomed, remains doomed, and is building hostility that could lead to another european-led world war–ironic given that the EU was supposed to reduce chances that Germany would start another.

jonf34November 18th, 2014 at 3:32 am

Question for Randy: I have lately come to wonder if a long term program, say health care, that is likely to be very expensive should be accompanied by a tax of some sort, progressive of course, and a short term project, say building some roads should just be done to gain the infrastructure and employment and no tax. I assume in these scenarios we are about at current unemployment levels. The JG (if we ever get it) I consider to be counter cyclical so no tax.

jonf34November 18th, 2014 at 3:34 am

It does seem they do just enough to keep the PIIGS in the union. I sure hope this does not lead to war, but this time Germany could be said to conquer Europe without firing a shot. (yeah, I heard that somewhere.)

PZ_November 21st, 2014 at 11:03 pm

What I mean is, Im pretty sure I could go through, say, last 50 posts here and not to find a single mention of need to reform. People who write at NEP do not talk about reform. It is rather odd to read how europe need more fiscal stimulus, when at the present it lacks the capacity, and this fact is in turn ignored completely. Readers do not understand how these countries could afford more spending, and how could they if it is not explained?

Even if some countries were to leave, what would remain would still need a reform. I don't think there is an appetite for american style fiscal transfer union, because EU is not a country but collection of nations, and if it were possible federalists would have built it long ago. What would be much more feasible would be to remove market constraint from government spending and agree to formulate union-wide, common, coherent fiscal policy.

L. Randall Wray L. Randall WrayNovember 22nd, 2014 at 2:04 am

Put your money where your mouth is. Go back through my previous 50 posts on the EMU and see if what you claim is true. You can check GLF as well as NEP. Before you make silly claims, why don’t you check them for accuracy?

L. Randall Wray L. Randall WrayNovember 22nd, 2014 at 2:08 am

Jont: I doubt we’d need to raise tax; you raise tax if you’ve reached full employment. “Expensive” is not the appropriate measure–10 billion or 10 trillion. What matters is the capacity to provide health care. We probably already have enough resources in healthcare–they just are not distributed correctly. Way too many nose jobs. Not nearly enough public health. And of course we have 25 million unemployed. So let’s provide universal (free) healthcare and then see how the resources are sorted out. If we don’t have enuf, induce more students into the field and as a last resort impose some taxes.

Loyal HoagNovember 24th, 2014 at 8:45 pm

Mr. Wray,
I am confused! Being a layman is my excuse. I wonder what our politicians excuse would be.

I grew up being taught that budgets are good policy, for personal and governmental spending. I do understand that we can print money until the universe sized pile of digits run out. Inconsequential, I presume, considering the universe is infinite.

What confuses me is the difference between personal spending (more money in than out) and Federal spending (more money out than in) other than the fact above.

I guess it would be advantageous to have infinity at one’s disposal.

jonf34November 26th, 2014 at 3:40 am

Yes, it is not the appropriate measure. We don't need taxes until we need them. But here's the thing. Most of the populace with the politicians as the cheerleaders will demand it bc inflation and deficits or something. Maybe it would go down easier if there were a small tax with promise of more as needed in the future. It's all really speculative at the moment.