If only Trump had read Abba Lerner!

21 Dec, 2017 at 13:12 | Posted in Economics | 4 Comments

The first financial responsibility of the government (since nobody else can undertake that 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. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend …

1958_AbbaLerner-e1494319651425In applying this first law of Functional Finance, the government may find itself collecting more in taxes than it is spending, or spending more than it collects … In neither case should the government feel that there is anything especially good or bad about this result; it should merely concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation.

An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments. According to the principles of Functional Finance, taxation must be judged only by its effects … Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation …

High income taxes need not discourage investment, because appropriate deductions for losses can diminish the capital actually risked by the investor in the same proportion as his net income from the investment is reduced.

Abba Lerner

4 Comments

  1. Trump doesn’t read. He already has “like, a good brain”, “the best words”, and “good sense”, so he doesn’t need to read anything.

    • Sorry, I forgot the guy is God’s gift to mankind …

  2. I’m too heterodox for Lerner.

    “that rate which at the current prices would buy all the goods that it is possible to produce”

    I don’t think you can know “all the goods that it is possible to produce.” Finance creates financial goods. Money market funds and investments become a good that people buy with fees and interest payments, and those financial products give people peace of mind and financial security, whether they ever buy any real physical widgets with the money or not. The financial goods are essentially unlimited in amount. Derivatives multiply the price value of underlying physical assets and become so disconnected from physical goods that they become a separate good, a sort of meta-good. It is futile to try to gauge the productive capacity of such meta, financial goods. Lerner’s first law betrays ignorance of finance and concedes too much to neoclassical assumptions about goods.

    “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.”

    Inflation, in my story, is mostly psychological. Prices are arbitrary since markets are not provably efficient. Therefore, inflation is arbitrary and the perverse psychology of price raisers should be regarded as a pathology that is best met with an indexation scheme linking all incomes to price rises, thereby guaranteeing that everyone’s real income purchasing power does not decrease, no matter how high nominal prices may go. Inflation’s unwanted effects can be nullified by indexation.

    Further, employment should not be a goal of public policy. More leisure should be the goal. Why should I get a job in accounting for a cruise ship company, serving rich old people, if I really want to study philosophy, write poetry, play drums? My brother chose accounting because he bought the idea that employment is good for society. But then he killed himself because working at something he saw no value in killed his spirit. Lerner is awfully smug, assuming that employment is an unqualified good.

    He’s right that deficits don’t matter, but he (and Trump) are wrong that work is an unquestionable good and inflation is something we cannot handle. The private financial sector creates money from the thin, hot air of bankers’ promises and redefines asset price and housing inflation as wealth creation, while using effective indexation to raise all participants’ incomes as asset prices inflate. We should expose this mechanism and ask, why can’t we create public money for a world-wide basic income, hold challenges to stimulate individual creativity, and index fully to nullify any potential inflation tax?

    • “Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation …”

      This is the Quantity Theory of Money. If we can manage inflation through indexation, then economists need not be concerned with controlling demand. We are really talking of money demand, which is separate from demand for essential goods and services, because money in savings becomes a good in itself. If I have money in the bank I need not consume more just because I can. Economists appear not to understand that.

      The trick as I see it is to move profit-seeking entirely to the financial sector, and decouple rational self-interest from provisioning of essential goods and services entirely. Get profit seekers to invest in pure virtual goods such as bitcoin instead of land. Then unenclose the vast amounts of underutilized land so I can roam freely, self-provisioning, unencumbered by markets or economists’ notions of what I should be doing.


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