Economist Stephanie Kelton on The Deficit Myth

[Canard DuJour]

So it all comes down to Smoke and Mirrors and Kabuki Theatre....?

That and the $500 bn/yr the financial sector spends on lobbying, employing 5 lobbyists for each congressman (in the US - proportionately similar elsewhere), to ensure that they get to lend the money supply into existence at interest. Blackrock isn't paying George Osborne a fortune for his expertise; it is doing so to show finance ministers around the world the rewards for playing by the rules.

 

[barbos]

 

[DBT]

Sarcasm?

Only partially. You seem to expect the economy to rest on some bedrock. If the govts promise to accept its currency as payment for taxes and fees is smoke and mirrors, what would you call secure?

Not a bedrock, a principle: good management of the economy...keeping income and expenditure under control which should mean not running up ever increasing deficit or debt or printing excessive amounts money as stimulus every time there is a crisis.


Basically;

What Is a Budget Surplus?

''A budget surplus is a period when income or receipts exceed outlays or expenditures. A budget surplus often refers to the financial states of governments; individuals prefer to use the term 'savings' instead of the term 'budget surplus.' A surplus is an indication that the government is being effectively managed.''

A budget surplus is when income or receipts exceed outlays or expenditures.
A budget surplus is usually used in reference to financial states of governments
The term "savings" is used to describe a budget surplus-type situation with an individual.

Overview

Economic and spending changes generate a surplus. A budget surplus is an indicator of a healthy economy. However, it is not necessary for a government to maintain a surplus. For instance, not having a budget surplus does not mean the economy is not being run efficiently.

A surplus implies the government has extra funds; these funds can be allocated to pay debts, which reduces the interest payable and helps the economy in the future. For example, a budget surplus can reduce taxes, start new programs and fund existing public programs, such as social security or Medicare.

In addition, a surplus can reduce the public debt, fund the military, infrastructure, energy, and public works, pay salaries, implement policy, or be saved to spend in the future once a deficit occurs. A budget surplus occurs after a reduction in costs and spending or both. An increase in taxes can also result in a surplus. A surplus decreases consumer demand, lowers consumer prices and slows down the economy.''

 

[bigfield]

"...A surplus implies the government has extra funds; these funds can be allocated to pay debts..."

This is the part of the conventional theory that doesn't make sense to me. Government doesn't need anyone to give them funds to pay for bonds; they can always pay.

The federal government (US or Australia) has an account at the central bank with an account balance of infinity. In the case of Australia's government, all of the revenue (i.e. taxes) that the government receives is effectively paid into this bottomless bank account. When you add a finite amount to an infinite amount, you get back an infinite amount, which means the revenue effectively disappears.

The government doesn't need to allocate money to pay debts. This is just an bookkeeping trick. A surplus doesn't mean "we paid some of our debts". Government always pays all of its debts (except when it voluntarily defaults)..Rather it means "we issued fewer bonds" or "we reduced our debts".

"...In addition, a surplus can...fund the military, infrastructure, energy, and public works, pay salaries, implement policy..."

These things can and do happen whether there's a surplus or a deficit.

"or be saved to spend in the future once a deficit occurs...''

Sovereign government can't save its own currency.

 

[Bronzeage]

There's a distinct difference between government finance and household finance when considering a "Surplus".

When a person's monthly income exceeds all their monthly bills, it's not called a surplus. We call it "expendable income." We can do whatever we want with it, because we haven't promised it to someone else. Prudent people put some of it away, because the future is uncertain.

A government starts with projected budget and projected tax revenue. If things go well, the economy expands, wealth increases, people make more money, and tax revenue exceeds the projection, and bang, there's a surplus. When things don't go well, or more likely the budget exceeds the projection, we have a deficit. Surpluses and deficits are the nature of the beast. For some reason, a lot of people see surpluses as something evil. Of course, these people often see taxation as a form of theft, as if they think the road between their front door and their workplace is an natural geological formation.

I have a friend whose wife is a teacher. He was telling me about her classroom and how she spent most of the school year with a leaking roof. There wasn't money in the budget and it had to wait. He said, "Any responsible corporation that had several dozen building that it expected to operate for 30 or more years would have a building maintenance fund. Profits would be contributed to it on a regular basis and it could be invested to earn interest. When a half million dollars was needed to replace a roof, the money would be available. No delay in making the repairs, while damaged accumulated."

The problem is, our school system is financed by a percentage of the local sales tax. This tax and any increase in this tax has to be approved in a general election. When the school board goes to the public and asks for more money for teacher's raises, or computers for every classroom, or the like, they know that having $10 million dollars in a building maintenance fund will cripple the chance of any tax increase. As a result, the political reality is a school system which operates on borderline poverty. A surplus which could be used for long term obligations is not possible.

 

[DBT]

This is the part of the conventional theory that doesn't make sense to me. Government doesn't need anyone to give them funds to pay for bonds; they can always pay.

Sure, they can always pay. But its better to have reserves to draw on rather than just keep printing more money....which may be quite fine to a point.

These things can and do happen whether there's a surplus or a deficit.

Of course. But running a surplus in good times while meeting its obligations to society and business is a sign of good government.

Sovereign government can't save its own currency.

Revenue can be allocated to any number of things, including an emergency fund. As you probably know, we also have an independently run Futures Fund.

 

[Lumpenproletariat]

"In the long run we're all dead" anyway, so go for it.

Hear The Bern Episode 51 | The Deficit Myth (w/ Stephanie Kelton) - YouTube

Economist Stephanie Kelton gives Briahna a crash course in monetary policy and why the United States would actually benefit from increased deficit spending - so long as it flows toward working people, not stock buybacks. Stephanie makes the case that, in the midst of the historic economic crash that COVID-19 is causing, the federal government could go much farther than last week's stimulus package to ease economic pain and prevent mass layoffs.

Stephanie Kelton is the author of the upcoming book "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy". She was interviewed by Briahna Joy Gray.

BJG introduced it with the issue of how we pay for universal coverage. SK then got into a common misconception about Federal-Gov't spending, that it works like a household, where one has to take money in to be able to send it out as spending. That is because the Federal Gov't can run up deficits. If an economy is running at capacity, then further deficit spending will cause inflation, and SK rightly recognized that that will happen, and that that is a bad thing.

But if an economy is not at productive capacity, then running deficits can be a good way of getting it going.

As to the Republicans running deficits with their tax cuts, SK points out that a deficit for one person can be a surplus for another person, so one might ask who is benefiting from the resulting surplus.

BJG then asked SK to explain what causes inflation, and she conceded that she has a hard time with such things. Then she mentioned a former Federal Reserve (US central bank) governor Daniel K. Tarullo, who concede that the Fed has no good model of inflation, even though it tries to keep inflation less than 2%/year. SK then got into theories of inflation. Two main theories. Supply-push and demand-pull. Both of them have in common supply less than demand. Oil shocks, with oil suddenly becoming less available, are supply-push, while too much money is demand-pull.

SK then stated that Western economies typically run with a lot of slack, like unemployed labor. For full employment, consider World War II, with its massive war-production effort.

Then she noted a study published by the Cato Institute about hyperinflation. Three researchers found 56 examples, and they tried to find the causes. No case of trying to achieve full employment. Zimbabwe - land redistributed to cronies who didn't know how to farm - they didn't produce enough food and food prices soared.

SK criticized the practice of letting unemployment happen rather than backstop employers' payrolls. BJG asked about what's on Republicans' minds, and SK noted Lindsey Graham's objection to paying people as much unemployment as they'd get for working. SK also suspects that some Republicans are afraid that their social inferiors will be able to have a good life, that it won't be an economic calamity if they do.

BJG then suspected that the elite wants everybody but them to have to live paycheck-to-paycheck to keep them working at jobs that they may dislike. Like need a lot of student-loan debt to get a high-paying job. Or be tied to one's job by one's medical insurance. SK then mentioned a Federal job guarantee.

Then they get into the national debt. Deficit spending is financed by selling Treasury bills. Gold standard = fixed price for gold, currency is convertible to it.

SK then got into the last years of the Clinton Presidency, when the Federal budget started running surpluses. The Congressional Budget Office predicted that the FedGov would keep on running surpluses and would eventually retire the Federal debt. The President's Council of Economic Advisers did a chapter of a report on what would happen if that was done, and it was made public with a Freedom of Information Act request. It would mean no more T-bills in circulation.

SK then talked about what it might take for politicians not to fear deficit spending so much - a lot of courage to defy the conventional wisdom about it.

This is a relief.

As long as the economy is not at productive capacity, we can run up the deficit as we wish, to pay all the bills as "a good way of getting it going."

And since there's never been an economy in history which was "at productive capacity," that means we're free to run up those deficits without limit.

We should start by simply raising the annual deficit to whatever the current budget is, so that all the programs are funded without having to impose any taxes. To get the economy going, no matter what. It's so nice to have these simple solutions to all our problems.

They should give that economist a Nobel Prize for fixing everything in our economy with this wonderful new Plan. Why didn't they ever think of that before? Just raise the deficits to pay for everything! Including to pay off the earlier deficits. What could possibly go wrong?

Every period, one could refinance one's debt and still come out ahead.

And if the China's and other lenders are hesitant, just increase the interest rates to attract more lenders. There's no limit to how high the principle and interest can be raised to attract whatever funds are needed from the bond-buyers.

Or even if no one will buy bonds, we still can borrow whatever we need:

Government doesn't need anyone to give them funds to pay for bonds; they can always pay.

The federal government (US or Australia) has an account at the central bank with an account balance of infinity.

There you go -- unlimited borrowing -- infinity! Just pay the entire federal budget every year with deficits, out of our infinite account.

So we can forgive all student loans, give everyone limitless free education and health care, reduce and eliminate all taxes, increase everyone's wages/salaries and pensions, and just live off future borrowing forever, with no end. As long as the economy remains at less than "productive capacity" (which means nothing), it has to work.

 

[bigfield]

Sure, they can always pay. But its better to have reserves to draw on rather than just keep printing more money.

What's the difference? It's the same dollars either way.

Of course. But running a surplus in good times while meeting its obligations to society and business is a sign of good government.

I think you have to be more specific about that. 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.

The Morrison Government attempted to achieve a surplus at a time when Australia was on the brink of recession. That's utterly incompetent management, but they tried to do it because the LNP, the ALP and the media all insist that a surplus is a sign of good economic management.

Sovereign government can't save its own currency.

Revenue can be allocated to any number of things, including an emergency fund. As you probably know, we also have an independently run Futures Fund.

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.

 

[Horatio Parker]

Sarcasm?

Only partially. You seem to expect the economy to rest on some bedrock. If the govts promise to accept its currency as payment for taxes and fees is smoke and mirrors, what would you call secure?

Not a bedrock, a principle: good management of the economy...keeping income and expenditure under control which should mean not running up ever increasing deficit or debt or printing excessive amounts money as stimulus every time there is a crisis.


Basically;

What Is a Budget Surplus?

''A budget surplus is a period when income or receipts exceed outlays or expenditures. A budget surplus often refers to the financial states of governments; individuals prefer to use the term 'savings' instead of the term 'budget surplus.' A surplus is an indication that the government is being effectively managed.''

A budget surplus is when income or receipts exceed outlays or expenditures.
A budget surplus is usually used in reference to financial states of governments
The term "savings" is used to describe a budget surplus-type situation with an individual.

Overview

Economic and spending changes generate a surplus. A budget surplus is an indicator of a healthy economy. However, it is not necessary for a government to maintain a surplus. For instance, not having a budget surplus does not mean the economy is not being run efficiently.

A surplus implies the government has extra funds; these funds can be allocated to pay debts, which reduces the interest payable and helps the economy in the future. For example, a budget surplus can reduce taxes, start new programs and fund existing public programs, such as social security or Medicare.

In addition, a surplus can reduce the public debt, fund the military, infrastructure, energy, and public works, pay salaries, implement policy, or be saved to spend in the future once a deficit occurs. A budget surplus occurs after a reduction in costs and spending or both. An increase in taxes can also result in a surplus. A surplus decreases consumer demand, lowers consumer prices and slows down the economy.''

So who is running a surplus domestically? Where does this solidly principle-based economy exist? Can you name one? Mind, exporters such as Germany and China don't count.

 

[SimpleDon]

Summary of Main causes of inflation

Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)
Cost-push inflation – For example, higher oil prices feeding through into higher costs.
Devaluation – increasing cost of imported goods, and also the boost to domestic demand.
Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.
Expectations of inflation – causes workers to demand wage increases and firms to push up prices.

Your source missed one. The one that has provided the small amount of inflation that we have had since the Great Recession is due to higher profits. As the stock market has gone higher the valuation of an individual corporation's stock has gone up, obviously, and the pressure to make ever higher profits, usually by raising prices or by moving production to China or other wage lowering means.

 

[lpetrich]

Your source missed one. The one that has provided the small amount of inflation that we have had since the Great Recession is due to higher profits. As the stock market has gone higher the valuation of an individual corporation's stock has gone up, obviously, and the pressure to make ever higher profits, usually by raising prices or by moving production to China or other wage lowering means.

Seems like a corporate-management version of workers pushing for higher wages.

 

[J842P]

Sarcasm?

Only partially. You seem to expect the economy to rest on some bedrock. If the govts promise to accept its currency as payment for taxes and fees is smoke and mirrors, what would you call secure?

Not a bedrock, a principle: good management of the economy...keeping income and expenditure under control which should mean not running up ever increasing deficit or debt or printing excessive amounts money as stimulus every time there is a crisis.


Basically;

What Is a Budget Surplus?

''A budget surplus is a period when income or receipts exceed outlays or expenditures. A budget surplus often refers to the financial states of governments; individuals prefer to use the term 'savings' instead of the term 'budget surplus.' A surplus is an indication that the government is being effectively managed.''

A budget surplus is when income or receipts exceed outlays or expenditures.
A budget surplus is usually used in reference to financial states of governments
The term "savings" is used to describe a budget surplus-type situation with an individual.

Overview

Economic and spending changes generate a surplus. A budget surplus is an indicator of a healthy economy. However, it is not necessary for a government to maintain a surplus. For instance, not having a budget surplus does not mean the economy is not being run efficiently.

A surplus implies the government has extra funds; these funds can be allocated to pay debts, which reduces the interest payable and helps the economy in the future. For example, a budget surplus can reduce taxes, start new programs and fund existing public programs, such as social security or Medicare.

In addition, a surplus can reduce the public debt, fund the military, infrastructure, energy, and public works, pay salaries, implement policy, or be saved to spend in the future once a deficit occurs. A budget surplus occurs after a reduction in costs and spending or both. An increase in taxes can also result in a surplus. A surplus decreases consumer demand, lowers consumer prices and slows down the economy.''

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.

 

[J842P]

Of course. But running a surplus in good times while meeting its obligations to society and business is a sign of good government.

No, it isn't.

 

[DBT]

Of course. But running a surplus in good times while meeting its obligations to society and business is a sign of good government.

No, it isn't.

Well that settles it!!!

 

[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;

Portfolio updates
We publish quarterly portfolio updates to provide details of the investment activity and performance of the funds.

The reports cover the performance of our funds over the quarter, and since inception.

Further information regarding the performance of the funds is available in our annual reports.

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.

That is why we talk about our task as investing for the benefit of future generations of Australians. It gives a real sense of purpose to what we do and inspires our team to do the very best job they can.

We balance the risk and return aspects of each fund’s investment mandate to both grow and protect our capital and build diversified portfolios.

Our investment approach is based on one investment team working together for the benefit of the portfolio as a whole. We call this our 'one team, one purpose' strategy. We emphasise making sure that teams collaborate and bring together the appropriate expertise from across the organization, responding nimbly and innovatively to opportunities.''

 

[DBT]

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.

 

[laughing dog]

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.

 

[Horatio Parker]

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.

 

[bigfield]

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.

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.

 

[bigfield]

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.

No, it's a macroeconomic theory modelling how the system works, and that theory doesn't accurately model reality.