An interview with Stephanie Kelton

1 Jul, 2020 at 13:25 | Posted in Economics | 2 Comments

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

mythEverything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business?

Yes, of course. We think that the government has borrowed, and we think that this is real debt. And neither of those things is correct. I say in the book that if I walk into a bank and borrow money, I’m borrowing money because I don’t have it. Right? That’s why I got to the bank to take out a loan. The federal government is not borrowing money because it needs money. It’s not borrowing because it doesn’t have the capacity to finance whatever it wants to spend money on. It has the fiscal capacity; it can just spend. And not only that, the government sells the bonds. And by the time the government sells the bonds, the spending has already taken place. So the bonds cannot possibly be the tool with which the government raises money in order to spend. It’s selling the bonds after the spending had already taken place. Why does it do that? It doesn’t need to borrow, it has already financed the spending.

So we don’t really understand — the public and most economists get this wrong — we don’t even understand what the purpose of selling bonds is. We treat it as a borrowing operation. It’s not. The purpose of selling the bonds is to drain off the reserves, the dollars, to remove some of the dollars the government has spent into the economy and replace them with treasuries. It’s a subsidy to the rich, is what it is.

AlterNet

To Keynes — as to Abba Lerner and MMT today — it was evident that the state had the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that meant that it had to take on ​debt and underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieving two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance’, austerity and​ balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

J. M. Keynes

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

Throughout history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

2 Comments

  1. SK: It’s a subsidy to the rich, is what it is.
    .
    This new dictum of MMT to the moral effect that the public debt is superfluous and merely another conduit of redistribution of income upward strikes me as potentially very dangerous. It seems to join the older, conventional wisdom that nonsensically talks up the public debt as a burden. (A critical mind might ask why the rich subsidize so much propaganda against the public debt if it only exists for their benefit, but I do not expecting thinking from the current generation MMT advocates.)
    .
    For a fiat currency, a large market in “zero-risk” public debt is a critically important extension, an extension that makes that currency into a useful money. The whole point of money is its fungibility thru time and that requires a highly liquid market for “zero-risk” securities to serve as a reservoir of savings and a reference point and a means of hedging uncertainty. Money, including the public debt, enables deals with an uncertain future, deals that greatly enhance the efficiency of economic cooperation. Money as a vehicle for insurance is so basic that I would think it hard to ignore. But, here we are.
    .
    Too small a public debt may well destabilize the whole system of banking and payments though apparently in the U.S. we are to try other methods of ruin in deliberate credit allocation first.

  2. I react just like Kelton to government debt, when I see someone say full employment and price stability should be our overarching macroeconomic goals: “Everything is wrong.”
    .
    Macroeconomics should be abandoned when making public policy. We should treat macroeconomic goals as we treat psychic goals. The idea that employment is good is contradictory to my experience. My own experience bears witness to the horrors that employment creates. My individual time-series average is very different from the assumed ergodic ensemble average that underlies the proposition that full employment should be the goal.
    .
    As for price stability: if we know prices don’t clear real markets, why maintain the goal of nominal price stability? You are maintaining a grossly unfair system. The worthiness of nominal price stability is as much of a myth as balanced budgets …


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