Monday, February 24, 2014

Macroeconomics #1

Originally I was trying to keep this blog very focused.  But it turns out a lot of days I just don't have it in me to write about personal, stay-at-home-dad type stuff, and so I don't write, and it breaks the chain.  So I'm going to write about whatever, and figure people can ignore the stuff that isn't their thing.

Which brings us to macroeconomics, and to this excellent (though long) post by William Black on the topic of news coverage of austerity budgeting.  I don't expect most people to read the whole article, though if you do bravo, but here's the key bit I want to highlight:

"It is not acceptable journalism to ignore the dominant economic view, 75 years of supporting events, and the empirical studies by austerians (the IMF) finding that fiscal changes have more powerful effects on the economy consistent with the dominant theory.  It is not acceptable journalism to ignore unemployment and inequality and the role of austerity in increasing both. "
Allow me to clarify and expand on this point briefly.  What Black is driving at is this - there is a dominant view in macroeconomics, which has held for over 75 years, that governments should not "tighten their belts" during periods of recession but should in fact spend more money and collect less money in taxes.

This view strikes non-macroeconomists as very odd and counterintuitive because people's experience with money suggests that when "times are tough" you have to cut back or "generate more revenue" as the common Newspeak phrase goes.  Also, economics is somewhat like climate science in that while there is broad agreement on many points, there exists a small rump of mostly non-scientists who make a living trying to muddy the waters and make it appear as if there is controversy even on these points of broad agreement.

So it falls to humble bloggers to say this:  despite what you hear from policymakers, think tanks, your Facebook friends, etc., there is a broad consensus in macroeconomics that austerity budgeting in a recession does not do any good and in fact makes the problem worse.  You can argue with that conclusion but if you are a reporter or commentator you should begin with the acknowledgement that this is, in fact, the overwhelming view of mainstream economics.  This is the meaning of the quip "We are all Keynesians now" that is attributed to Milton Friedman in the 1960's.

It's beyond the scope of this post to go into the academic research, which is voluminious, into the phenomenon of austerity budgeting.  What we can do is address one extremely important misconception about federal (national) budgets.


This is extremely important.  Many lay people have a misconception that deficits mean that the government has borrowed money from someone - a bank, the Chinese, etc. - and that this money will have to be repaid by future taxpayers.  In a system like ours (Europe is a bit different which is why their system is in so much of a worse pickle than we are), the federal government does not borrow money in order to spend.  Bond issue is a completely separate consideration that has nothing to do with financing government operations.  The federal government simply spends money into existence.

The situation of a federal government is exactly like the situation if you had a system of scrip in your home for motivating your children to do chores.  You issue your child a piece of scrip each time he or she cleans up a room or takes the trash out, and the scrip is redeemable later for some privilege.

Since it's impossible to run out of scrip (because you issue it) and since you control the privileges your kids have, there is no level of debt that is "unsustainable" in the sense of not being able to "pay it back."  You didn't borrow the scrip from anyone, and since from your perspective it's merely a notional extension of your police power over your kids, there's nothing to run out of in any case.

The federal government is in the same situation.  From the USG's perspective, a dollar is simply a voucher against future (or present) tax liability.  Issuing too many such vouchers can erode their usefulness ("inflation") but there is no sense in which issuing too many such vouchers can lead to a "debt crisis" in the traditional sense, if a nation controls its own currency.

This is widely known and understood by macroeconomists, but unfortunately is known and understood by almost no one else, including policymakers.  As long as that sad state of affairs persists, we will persist in these terrible, useless policies that are causing untold suffering and waste for no reason at all.

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