Economist Stephanie Kelton on The Deficit Myth

[DBT]

The Future Fund doesn't make any sense. The Commonwealth government has a bank account full of IOUs written to itself. The money in that bank account is not in the money supply, which means that it is effectively the same as money that doesn't exist at all. It's really just a political instrument meant to imitate the appearance of a personal savings fund.

That doesn't appear to be the case.

The Future fund apparently does have money invested in the market and various enterprises

The government owns shares. Shares aren't money.

Shares have monetary value that rise or fall in value and can be readily sold and bought.

If if the government buys shares from someone, the money the government spends to buy the shares goes into someone's bank account, therefore that money is in the money supply.

If the government sells shares to someone, the money the government receives for the shares is no longer in the money supply.

Government spending money = money added to the money supply.
Government receiving money = money removed from the money supply.

You complain about theatre and illusion. The Future Fund is a perfect example of that: it presents the illusion that the Commonwealth's cashflow works like a corporation's cashflow.

I'm not saying that the economic system, as I have described and supported with quotes and links, is an illusion or a Kabuki theatre....which was obviously referred the claim/illusion that printing money is the answer to running an economy.

Plus investing in the market, buying shares in a company, is investing in business and economic activity. Which is neither theatre or illusion.

 

[DBT]

I'd like to know where are the economies that run surpluses by taxing more than they spend. According to DBT, that's basic good management. Some country must be doing it.

Of course there are critics, but The Howard government in Australia ran surpluses.

Introduction
''An important part of the fiscal objective under the Howard Government has been the achievement and maintenance of a budget surplus. In the present financial year, 1998-99 the surplus should come in at $3.1 billion or 0.5 per cent of Gross Domestic Product (GDP). The estimate for 1999-2000 is a surplus of $5.4 billion or 0.9 per cent of GDP. In cash terms and taking asset sales into consideration, the headline cash balance is a surplus of $8.4 billion in 1998-99 rising to $23.0 billion in 1999-2000.''


It's not necessarily a matter of taxing more, but reducing unnecessary expenditure in the form of wasting money

Some examples in the US;

DOWN. THE. DRAIN.
''It’s difficult enough managing your own money without making unwise impulse buys, so when governments and bureaucracies receive billions of taxpayers’ dollars, those splurges can multiply exponentially. These are some of the most baffling ways state and federal institutions have been busted for wasting tax dollars in recent American history..''

 

[bigfield]

The government owns shares. Shares aren't money.

Shares have monetary value that rise or fall in value and can be readily sold and bought.

Yep, but they aren't money.

The government can't buy things (like emergency medical supplies) with shares. The shares are useless to the government.

 

[bigfield]

I'd like to know where are the economies that run surpluses by taxing more than they spend. According to DBT, that's basic good management. Some country must be doing it.

Of course there are critics, but The Howard government in Australia ran surpluses.

Introduction
''An important part of the fiscal objective under the Howard Government has been the achievement and maintenance of a budget surplus. In the present financial year, 1998-99 the surplus should come in at $3.1 billion or 0.5 per cent of Gross Domestic Product (GDP). The estimate for 1999-2000 is a surplus of $5.4 billion or 0.9 per cent of GDP. In cash terms and taking asset sales into consideration, the headline cash balance is a surplus of $8.4 billion in 1998-99 rising to $23.0 billion in 1999-2000.''


It's not necessarily a matter of taxing more, but reducing unnecessary expenditure in the form of wasting money

In order to achieve budget surplus, the Howard government cut necessary expenditure and sold national assets including Telstra.

If you think that was good economic management then you ought to explain why.

 

[DBT]

I'd like to know where are the economies that run surpluses by taxing more than they spend. According to DBT, that's basic good management. Some country must be doing it.

Of course there are critics, but The Howard government in Australia ran surpluses.

Introduction
''An important part of the fiscal objective under the Howard Government has been the achievement and maintenance of a budget surplus. In the present financial year, 1998-99 the surplus should come in at $3.1 billion or 0.5 per cent of Gross Domestic Product (GDP). The estimate for 1999-2000 is a surplus of $5.4 billion or 0.9 per cent of GDP. In cash terms and taking asset sales into consideration, the headline cash balance is a surplus of $8.4 billion in 1998-99 rising to $23.0 billion in 1999-2000.''


It's not necessarily a matter of taxing more, but reducing unnecessary expenditure in the form of wasting money

In order to achieve budget surplus, the Howard government cut necessary expenditure and sold national assets including Telstra.

If you think that was good economic management then you ought to explain why.

I don't agree with everything the Howard government did. Selling national assets is not a good way to achieve the desired result. A better way to achieve a surplus, or at least balance the books, would be to cut waste and unnecessary spending

 

[bilby]

In order to achieve budget surplus, the Howard government cut necessary expenditure and sold national assets including Telstra.

If you think that was good economic management then you ought to explain why.

I don't agree with everything the Howard government did. Selling national assets is not a good way to achieve the desired result. A better way to achieve a surplus, or at least balance the books, would be to cut waste and unnecessary spending

Could you perhaps give an example of some Commonweath government spending that you feel is unnecessary and/or wasteful, in the order of tens of billions of dollars (ie with a similar value to the Telstra sale)?

The problem with wasteful and unnecessary spending by the government is that every time someone identifies a specific area of "waste", someone else points out that it is in fact either necessary, unavoidable, or of clear net benefit to the community. Or maybe all three.

Where is the obvious and clear-cut waste of tens of billions? Or is this just one of those things that "everybody knows" because the Liberal Party propaganda has told them it over and over, until they believe it without ever having thought about whether or not it is true?

Somewhat like the idea that "running a surplus" equals "responsible management", which everyone knows, despite it being nonsense.

 

[Lumpenproletariat]

No need for "demand" -- No need for "jobs! jobs! jobs!"

What conditions need to be present to warrant a stimulus?

The Howard government ran surpluses during the mining boom, despite the fact that Australia didn't have full employment. That's poor management because government should have been spending money to create demand, which in turn creates jobs, which gets us to full utilisation of the workforce.

There's a dogma here (or 3 versions of the same dogma) which makes no sense, though demagogues resort to it again and again because it wins applause from the vulgar masses. Perhaps it reflects a deep hatred the masses have toward themselves, or toward others of the herd because the herd is too large, or toward others of them who are viewed as a threat -- like a herd of elephants which might go on a stampede if something is not done to corral them into "jobs" to keep them out of mischief.

• create demand

• create jobs

• increase "workforce" utilization to the maximum


None of these makes any sense, but they are promoted religiously and mindlessly by some kind of basic instinct which no one can explain. No one ever questions the above dogma, but rather they just repeat it over and over, religiously, like a religious chant, and everyone bows down to this religion, like to a religious statue or idol or golden calf.

There are reasons to go into debt in order to pay for something which is needed now. Needs for infrastructure, for emergencies, to pay for war, etc. But there is never a need to "create demand" or "create jobs" or just get someone into "utilization" per se.


DEMAND

There is only a need to SATISFY demand, never to create new demand for something. Just because some producers can't sell all their inventory does not mean there's any need for demand. Rather, if they overproduced something, they made a mistake, and they need to reduce their price on the overproduced items and slow down that production, or even cease producing it if the demand for it is that low.


JOBS

The only need for "jobs" is a need for some work to be done in order for needed service or production to happen, regardless whether there is someone unemployed. Just because there is an "idle" human standing around looking unused does not mean that a "job" has to be "created" as a slot to place him into, because he needs to be kept out of mischief. If there's really a need for that person, then that means there's a need to move that person to the "job" which already is there and is open and needing to be filled. It does not mean there's a need to "create" a job.

And if there is no job open and needing to be filled, it doesn't follow that there's any need to "create" one for this "idle" human, because you feel sorry for him or think he's a threat if we don't find a "job" for him to do.

There's never a need to "create" a job per se, but only to get needed work done, regardless whether the unemployment rate is 1% or 20%. The need for a "job" is no greater just because the unemployment rate is higher. It's only an increased need for work to be done which might increase the number of real "jobs" -- whereas new "jobs" created out of pity, only to absorb an increased number of hapless unemployed bodies hanging around, are not real jobs, but are babysitting slots.


MAXIMUM UTILIZATION OF "THE WORKFORCE"

You can always increase the utilization of the workforce: just pay the excess workers to sit and twittle their thumbs all day to get all of them into use.

No, there's good reason for some of them to be idle at times when they're not needed. If there's nothing cost-efficient to use them for, then it's better for them to be idle. They are not "going to waste" if there's no "work" for them to do. In some cases they could be "put to work" doing something of low value and paid only $3/day, if they're willing to and are desperate for a buck. But it's never good for society to pay them any more than the real value of the work done.

The value of the work is not that the worker is paid and then spends the money to "create demand" in the market. Demand per se has no value, or serves no need. The worker's contribution is never his "demand" caused by the money paid to him/her and then spent. The worker's value is only the actual work done, and if the wage is higher than the cost-efficient level, then it's a waste of money, regardless of any "demand" it would create.

 

[DBT]

Offhand; a few examples of money wasted by various Governments. A more thorough search should bring up more.

In the US, for instance;
These Stunning Examples Of Government Waste Cost Taxpayers $16 Billion
''Twice each year, the IGs report back to Congress with details on what they found.


We went through the most recent edition of these reports to find the most egregious instances of government waste or inefficiencies that the Inspectors General found.

Several of these — especially ones that involve recurring payments or structural inefficiencies — haven’t been fixed yet.

What we found in the reports could have saved the government a combined total of more than $15.75 billion.''


I don't agree with all the examples in this site, but in Australia;

These are the weird ways the government is spending our money.

The government doesn’t have a revenue problem – it’s got a spending addiction. In Labor’s last budget it spent $376 billion. In this financial year a Coalition government will spend a tad over $500 billion. A year before Labor lost in 2013 the Institute of Public Affairs published a glorious list of 75 things a Coalition government should do. Almost all involved a reduction in government spending. Barely any have been attempted. And the champions of freedom reneged on a core 2013 campaign commitment to repeal 18C which would have restored freedom of speech.''

''It’s the great conundrum of government policy: we have a big shortage of infrastructure, but also waste billions on it.

This seeming contradiction is easily explained: particularly in recent years, and at both state and federal levels, much money is being spent on infrastructure projects.

Trouble is, a lot of the dough’s being spent on flashy or low-priority projects, at the expense of more important but less sexy projects, particularly in the overcrowded outer suburbs.''

''So why is infrastructure spending so rife with wastefulness? Mainly because it’s one of the few areas of policy left where the pollies themselves have much scope for playing Santa Claus in particular states and even particular electorates, at times of their own choosing. Byelections, for instance.

It’s often too tempting for pollies to pick projects according to the votes their announcement is intended to bring, rather than the extent to which the public benefits they bring exceed their costs.''

 

[Canard DuJour]

You keep quoting investopedia as if it were some sort of authoritative source on macroeconomics and government policy. It isn't. It's only an OK source on finance topics to begin with, let alone the subjects I mentioned.

I can quote other sources saying the same thing. I can say these things myself. Apart from the Smoke and Mirrors and Kabuki Theatre that some appear to love, it is basically how the economic system works.

Most of what you've quoted doesn't contradict what others are trying to tell you. And the bits that do are patently wrong.

As national debt per capita increases, the likelihood of the government defaulting does not increase. It remains zero. Rising national debt has not forced bond yields up. Most rich, stable countries have run nearly permanent deficits for centuries. Surpluses, unless small and short, tend to precipitate recessions.

We are patently not paying off our parents' and grandparents' public debt, they didn't pay off their parents' and grandparents' debt and there's no reason to think our children and grandchildren must pay off ours.

 

[Canard DuJour]

We invest public asset funds on behalf of future generations of Australians.

'Every dollar that we make through those funds is a dollar that adds to Australia’s wealth and contributes to its future.

Every dollar in those funds originated from either a commercial bank loan or govt deficit spending. For every financial asset there is a corresponding liability somewhere. The bank loans must be repaid plus interest. Any interest the fund receives is being paid by someone. Any net increase in the dollars available to Australians via the fund originated as govt deficits.

The only exception would be where the fund gains from foreign assets, in which case the corresponding liabilities are outside Australia.

This isn't just theory, it's clearly visible in national accounting by sector:

The same holds for Australia, UK, Canada, Japan.. The govt and private sector balances are necessarily mirror images (+/- foreign trade balance). Govt surpluses push the private sector into deficit by reducing the money supply, which households and firms can only replace with bank loans.

The only reason to run a govt surplus is to reduce aggregate demand when runaway inflation threatens. A govt surplus does not put anything by for a rainy day.

 

[bigfield]

I don't agree with all the examples in this site, but in Australia;

These are the weird ways the government is spending our money.

You need to explain to which of those those things you think should be cut. The article just says that they're "weird"; it doesn't call for them to be cut.

The government doesn’t have a revenue problem – it’s got a spending addiction. In Labor’s last budget it spent $376 billion. In this financial year a Coalition government will spend a tad over $500 billion. A year before Labor lost in 2013 the Institute of Public Affairs published a glorious list of 75 things a Coalition government should do. Almost all involved a reduction in government spending. Barely any have been attempted. And the champions of freedom reneged on a core 2013 campaign commitment to repeal 18C which would have restored freedom of speech.''

Here's the IPA's list: https://ipa.org.au/ipa-review-articles/be-like-gough-75-radical-ideas-to-transform-australia

Please list the items you think should have been implemented.

''It’s the great conundrum of government policy: we have a big shortage of infrastructure, but also waste billions on it.

This seeming contradiction is easily explained: particularly in recent years, and at both state and federal levels, much money is being spent on infrastructure projects.

Trouble is, a lot of the dough’s being spent on flashy or low-priority projects, at the expense of more important but less sexy projects, particularly in the overcrowded outer suburbs.''

''So why is infrastructure spending so rife with wastefulness? Mainly because it’s one of the few areas of policy left where the pollies themselves have much scope for playing Santa Claus in particular states and even particular electorates, at times of their own choosing. Byelections, for instance.

It’s often too tempting for pollies to pick projects according to the votes their announcement is intended to bring, rather than the extent to which the public benefits they bring exceed their costs.''

I think Gittins makes a good argument that government wastes a lot of money on unnecessary infrastructure projects, but he also makes the point that the government fails to fund a lot of necessary infrastructure projects.

Suppose we funded all of the necessary infrastructure projects and cancelled the unnecessary infrastructure projects. Would we end up spending more, or less?

 

[DBT]

You need to explain to which of those those things you think should be cut. The article just says that they're "weird"; it doesn't call for them to be cut.

Some are questionable, some could be said to be a waste of tax payer dollars, while others disagree. It was a quick grab. There are plenty of examples. Another one is the ongoing submarine debacle and other defense purchases;
Quote;
3 Collins-Class Submarine Replacement Project. This $50 billion project seeks to replace Australia's problem-plagued Collins-class submarines with subs from French shipbuilder DCNS. The project has design issues because standard French subs are nuclear-powered. There is a bipartisan commitment to buying diesel-electric powered subs, and (seemingly for vote-buying reasons) to building them in Adelaide, even though this might add 40 per cent to the cost. The Australian contractor, Australian Submarine Corporation (ASC), also has a dreadful record on other projects.
Advertisement

Anecdotal evidence suggests that (privately) our defence professionals support buying off-the-shelf nuclear-powered submarines, for reasons of performance, reliability, and much more bang-for-the-buck.

The mistake of the sub project is being repeated in the recently announced decision to spend $35 billion building nine British-designed anti-submarine frigates (mainly) at SA's Osborne shipping yard. ASC is again to be the main domestic player (in another vote-buying exercise), with the contract being rushed in order to prevent the Adelaide shipyards being shut down due to lack of other work. It seems that the hull will be Australian built with most of the systems and internal workings coming from overseas.

The stark truth is that the government could be saving tens of billions, and be getting more reliable vessels by instead shutting down Australia's (uncompetitive) ship/sub building industry, and buying the superior overseas product at much lower cost.''

I think Gittins makes a good argument that government wastes a lot of money on unnecessary infrastructure projects, but he also makes the point that the government fails to fund a lot of necessary infrastructure projects.

Suppose we funded all of the necessary infrastructure projects and cancelled the unnecessary infrastructure projects. Would we end up spending more, or less?

Necessary infrastructure should be planned and built according to budget without wasting money on white elephants and unnecessary works. Surely the government should have enough expert advisors to make informed decisions without making stupid and wasteful decisions like the submarine projects, money that could have gone to better use.

 

[Axulus]

You keep quoting investopedia as if it were some sort of authoritative source on macroeconomics and government policy. It isn't. It's only an OK source on finance topics to begin with, let alone the subjects I mentioned.

I can quote other sources saying the same thing. I can say these things myself. Apart from the Smoke and Mirrors and Kabuki Theatre that some appear to love, it is basically how the economic system works.

Perhaps for those who think "Smoke and Mirrors and Kabuki Theatre" are accurate descriptions of the modern financial and economic system.

One of the basics of accounting that your proposals ignore is that total assets = total liabilities. When a gov't has a surplus and saves it some form (i.e. an asset), there is a corresponding liability somewhere.

In addition, you ignore the idea of "opportunity cost". When a gov't runs a surplus, the surplus funds are taken from taxpayers. So, while the gov't may take those funds and "invest" in some assets, those funds would have been used by the taxpayers. You ignore the foregone return and benefits from those funds.

Sorry, you are completely wrong from an accounting standpoint. Total assets = total liabilities + equity. Assets can just simply be part of equity.

 

[Axulus]

We invest public asset funds on behalf of future generations of Australians.

'Every dollar that we make through those funds is a dollar that adds to Australia’s wealth and contributes to its future.

Every dollar in those funds originated from either a commercial bank loan or govt deficit spending. For every financial asset there is a corresponding liability somewhere. The bank loans must be repaid plus interest. Any interest the fund receives is being paid by someone. Any net increase in the dollars available to Australians via the fund originated as govt deficits.

The only exception would be where the fund gains from foreign assets, in which case the corresponding liabilities are outside Australia.

This isn't just theory, it's clearly visible in national accounting by sector:

The same holds for Australia, UK, Canada, Japan.. The govt and private sector balances are necessarily mirror images (+/- foreign trade balance). Govt surpluses push the private sector into deficit by reducing the money supply, which households and firms can only replace with bank loans.

The only reason to run a govt surplus is to reduce aggregate demand when runaway inflation threatens. A govt surplus does not put anything by for a rainy day.

Bullshit. The private sector can create non debt assets and sell shares in those or increase corprate assets via capital investment. No need for government deficits to do that.

 

[Axulus]

The government would need to be investing its savings, [blah blah etc]

What are the government's "savings"?

I prefer to refer to equity upon further thought. I want government total assets to exceed liabilities, not the other way around. If you don't want to count cash in the bank as an asset, fine. Then savings would be acquiring hard assets like real estate, infrastructure, commodities, stock, etc.

 

[Axulus]

The government would need to be investing its savings, purchasing assets. During good times, this increases business investment which increases the production capacity of the country. Inflation would be mitigated when those assets are sold and the resulting money spent by the government during bad times since the economy is able to produce more output. Additionally, savings can be invested internationally, which will tend to increase exports. During bad times those savings can be cashed in to bring in imports, which is another way to reduce the inflation you are talking about since we are effectively utilizing the output capacity of other countries when we buy imports.

Even if the money is put into a commercial bank account and available for lending during good times, that will also increase business investment to an extent and mitigate inflation in the manner I described.

The federal gov't using a private commercial bank (or banks) for deposits creates an advantage for those banks and opens up an avenue for corruption since those banks now have access to more loanable deposits. Which in turn, means that the supply of money will increase to the extent those deposits are lent. In otherwords, there is a very real risk of inflation from gov't saving.

Don't we already have that problem with the federal reserve increasing bank reserves via treasury purchases and loaning funds to banks? Why would the government holding accounts at commercial banks increase corruptability? Don't many state and local governments hold accounts with commercial banks? If the evidence is there that it does more harm than good I'm with you. I don't have a dog in that fight.

 

[Axulus]

The government owns shares. Shares aren't money.

Shares have monetary value that rise or fall in value and can be readily sold and bought.

Yep, but they aren't money.

The government can't buy things (like emergency medical supplies) with shares. The shares are useless to the government.

Of course it can. It can sell the shares and then acquire the medical supplies with the proceeds. The money is just like a middle man to make the transaction easier. If someone with medical supplies wanted the shares, one could in theory do a direct trade of shares for supplies.

 

[bigfield]

Yep, but they aren't money.

The government can't buy things (like emergency medical supplies) with shares. The shares are useless to the government.

Of course it can. It can sell the shares and then acquire the medical supplies with the proceeds. The money is just like a middle man to make the transaction easier. If someone with medical supplies wanted the shares, one could in theory do a direct trade of shares for supplies.

Sure, but since the government has to convert the shares back to money in order to buy things, what's the point of spending money on shares in the first place?

(And yes, in theory the parties could swap shares for goods, but this isn't what happens in practice.)

 

[Jokodo]

Yep, but they aren't money.

The government can't buy things (like emergency medical supplies) with shares. The shares are useless to the government.

Of course it can. It can sell the shares and then acquire the medical supplies with the proceeds. The money is just like a middle man to make the transaction easier. If someone with medical supplies wanted the shares, one could in theory do a direct trade of shares for supplies.

Sure, but since the government has to convert the shares back to money in order to buy things, what's the point of spending money on shares in the first place?

(And yes, in theory the parties could swap shares for goods, but this isn't what happens in practice.)

What's the expected effect if the government offloads 10s or 100s of billions worth of shares in (domestic) companies during a time of recession/crisis in order to convert their "emergency fund" to cash? Doesn't that even run the danger of deepening the crisis?

 

[Jokodo]

And what's the legal ramification for the government massively buying shares in the first place? Doesn't that open the door wide to corruption and to favouring one participant of the market over another?