1 Ikus http://bilbo.economicoutlook.net/blog/?p=33152.

2 Ingelesez: “Last week, the shadow British Chancellor, John McDonnell confirmed that the British Labour Party under Jeremy Corbyn will not be part of a progressive realignment of the public debate regarding fiscal policy. By that I mean, they have chosen, probably for misplaced ‘political’ concerns (leaving aside total ignorance), to reinforce in the public mind the neo-liberal myths relating to the capacities of a currency-issuing government to spend and advance prosperity. I have no doubt that John McDonnell desires, genuinely, to advance the material well-being of the working class in Britain. His public career to date would suggest that. But like many on the Left, he has been seduced by the neo-liberal snake oil into believing that fiscal rules that bind a currency-issuing government to balance, in total or in part, the fiscal situation and that such a government should submit itself to the dictates of a technocracy full of mainstream economists, is a necessary requirement of responsible fiscal management. His most recent statements really amount to surrender. The British Labour Party is staying faithful to its Monetarist roots, which were established in 1974 under Harold Wilson’s second tilt at the top job. The distractions of New Labour and now Jeremy Corbyn has not really changed anything. This is a neo-liberal party no matter what they claim and their advice and underpinnings are firmly neo-liberal.”

3 Ingelesez: “Consider a household or a business firm. The first thing they have to work out in terms of their ‘economies’ is how to generate spending capacity.

Without spending capacity, these private entities can have no command over any real resources that they may desire to advance their specific interests.

Spending capacity can come from labour income (household) or revenue from product sales (firms), running down past savings, asset sales (that is, reducing the wealth position of the entity), or by borrowing.

The fact that this spending capacity is not innate for these entities allows us to depict them as ‘financially constrained’.

In this context, the concept of a ‘budget’ becomes one of managing the financial sustainability of the entity.

(…)

A moment’s reflection will tell you that these concerns are not applicable to a currency-issuing government, which spends that currency into existence as part of a process whereby it accesses the real resources owned by the non-government sector and deploys them to advance public interest.

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

First, there is no analogy for such a government in terms of household or business firm bankruptcy. Such a government can never run out of money (‘go broke’).

Second, such a government can use its innate spending capacity (innate because it issues the currency) to purchase what ever is for sale in that currency whenever it desires. It has no necessity to engage in prior ‘revenue’ raising activities, such as taxation and/or borrowing, in order to facilitate those purchases (spending).

By way of qualification to that previous remark, we recognise that, given the real resources that the government deploys are ‘owned’ by the non-government sector, which may prefer to use them to their own ‘private’ advantage (as opposed to the broader social good), the government has to seek a way to deprive the non-government sector of that usage.

In other words, one of the activities of a currency-issuing government is to create idle real resources in the non-government sector there can be subsequently deployed by that government in pursuit of its electoral mandate.”

4 Ingelesez: “Modern Monetary Theory (MMT) shows that this is one of the major roles of taxation – to create unemployed real resources that can then be used by the public sector.

The public sector then deploys these resources through spending. We should note that the need to deprive the non-government sector of spending capacity via taxation is to ensure that total spending is commensurate with the available real resources in the economy.

If the growth in nominal spending outstrips the productive capacity of the economy then inflation becomes the problem.

(…) it also becomes clear that if the non-government sector does not desire to use all of its available income after taxation – that is, it desires to save overall – then there will a gap between income generated and total spending, other things equal.

The economy generates income from deploying available resources in production in response to expected spending. Should the actual spending be less than the spending that firms expected, then the current level of production will be ‘too high’.

That is, firms will have produced more than would be justified by the current level of sales and as a consequence they will be forced to accumulate unintended inventory (unsold production).

As a result, if firms revise their expected sales downwards, then they will cut back production and increase the stock of idle resources, including labour, in the economy. That is, unemployment will rise.”

5 Ingelesez: “We should be clear on the temporal causality that operates in a monetary economy.

Government spending provides revenue (income) to the non-government sector, which then allows the latter to extinguish its taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.

It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector, which allows the government to pursue its economic and social policy program.

While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work, which eliminates the unemployment created by the taxes.

So it is the introduction of State Money (which we define as government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment.”

6 Ingelesez: “For all the goods and services produced in any period to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period).

Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages). This unemployment thus occurs when the private sector, in aggregate, desires to earn the currency through the offer of labour but doesn’t desire to spend all it earns, other things equal.

As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.

In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase total spending.”

7 Ingelesez: “Thus we understand that the purpose of the currency of the government and the fiscal policy choices that bring that currency into existence is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.

Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency.

This includes, of-course, the offer of labour by the unemployed.”

8 Ingelesez: “The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. Either government spending is too low relative to the current tax receipts or taxes are too high relative to the level of government spending.

This makes the purpose of fiscal policy clear. It is not to balance any financial accounts. Rather, it is to generate full employment.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid.”

9 Ingelesez: “In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). (…) it is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.”

10 Ingelesez: “… fiscal sustainability is a ‘real’, not a financial concept.

(…)

In a fiat monetary system where the national government issues its own currency and floats it on international markets:

• A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.

• The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.

• A currency-issuing government can always meet the liabilities it issues in its own currency.

• Nations that have ceded their sovereignty by entering currency zones (such as the Eurozone); by dollarising their currencies; by running currency boards; and similar arrangements clearly are not sovereign and face the same constraints that a country suffered during the gold standard era.

In the real world, rather than in the mainstream macroeconomics textbooks, the concept of fiscal space and fiscal sustainability is real, not financial.

Please read the following introductory suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – to learn how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.

What these blogs will teach you is that the purpose of fiscal policy is to ensure there is full employment and price stability ...”

11 Ingelesez: “Lerner saw the economy as a vehicle that we (through the government) can control to achieve our collective well-being. This is in contrast to the neo-liberal concept of the economy as a self-regulating mechanism, which demands us to act as sacrificial lambs to maintain its ‘health’.

(…)

Lerner considered fiscal and monetary policy to be ways in which government can ‘steer’ the economy to avoid the crises that the free market approach creates.

(…)

Abba Lerner distinguished between what he called Functional Finance and Sound finance, the latter being the orthodoxy he confronted.

‘Sound finance’, which also dominates the public debate in the current period is usually expressed in terms of some defined fiscal and monetary policy rules – for example, governments should aim for a fiscal balance or the central bank should only allow the money supply to increase in line with the rate of real output growth.

These rules, which are rarely challenged, usually disguise an underlying conservaitve morality about the role of government (for example, deficits are characterised as ‘living beyond the means’ etc).

By way of departure, Lerner considered a government should always use its policy capacity to achieve full employment and price stability and thought that fiscal or monetary policy rules based on conservative morality were not likely to help in that regard.

In contrast to ‘Sound finance’, Lerner said that (…):

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound … The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.

The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. The government can increase total spending by spending more itself or by reducing taxes so that the taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced.”

12 Ingelesez: “… the concept of ‘budget repair’ assumes that the fiscal balance … in disrepair and needs to be fixed.

It is one of those neo-liberal metaphors that are designed to mislead us and to lead us into a construction of the fiscal balance that is inapplicable to a modern monetary system.

It biases our thinking into believing that deficits are bad and surpluses are good and that there is something irresponsible or wanton about a government that is running a continuous fiscal deficit.

Please read my blog – Framing Modern Monetary Theory – for more discussion on this point.

It also begs the question what a healthy ‘budget’ would look like.

Lerner’s statement of purpose – his ‘first law of Functional Finance’ – recognises the basic rule of macroeconomics – that spending equals income and output, which drives the demand for labour.

… mass unemployment results from insufficient spending – it is a macroeconomic problem. The neo-liberal claims that unemployment arises because, for various reasons, individuals do not seek work hard enough, totally misses the point. An individual cannot search for jobs that are not there!

In other words, the government responsibility should be to adjust its spending and taxation to ensure that all production is purchased and that this level of production generates jobs for all, such that the society cannot produce any more goods and services with its current available inputs.

What are the financial implications of this? Lerner noted that if in fulfilling its responsibilities, the government records a fiscal deficit, then it “would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything especially good or bad about this result”.

The goal is to “concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation”.

Importantly, assessments of ‘good’ or ‘bad’ are defined purely in terms of whether the government is achieving its real goals.”

13 Ingelesez: “Obviously, moral considerations enter at the stage of setting goals. It is clearly a values-based position to aim for a state where everyone can find work that desires to do so.

Once agreed that this will be the societal goal, then we should be indifferent, if in different circumstances (for example, the strength of private sector spending), a deficit of 1 per cent of GDP or a deficit of 5 per cent of GDP is required to meet that goal.

Thinking in this way flushes out where the ideology lies.

The neo-liberals obscure their disregard for mass unemployment by claiming that the 5 per cent deficit is dangerous and unsustainable. If the public truly understood that the 5 per cent deficit is as sustainable as the 1 per cent deficit, then the neo-liberals would be forced to debate their preference for mass unemployment.”