August 9, 2017

MMT: The joy of public deficit spending

Comment on Peter Cooper on ‘Short & Simple 14 ― Direct Impacts of Fiscal Policy on Net Financial Assets’

Blog-Reference

Peter Cooper argues in favor of public deficit spending: “The government spending, … causes an increase in the net financial assets (financial assets minus financial liabilities) of non-government.”

The term non-government covers the business- and the household sector. It is, obviously, of utmost importance whether the increase of financial assets takes place in the household or the business sector. Peter Cooper treats the first case and ignores the second completely. Let us remedy the omission.

There are three cases in a consumption economy without government activity, (i) household sector spending C is equal to wage income Yw, or (ii), spending C is greater than wage income Yw, or (iii), spending C is less than wage income Yw.

Here, case (i) is taken, i.e. budget balancing of the household sector, i.e. C=Yw. When government is added with pure deficit spending, i.e. spending G is positive and taxes T are zero, then the sum C+G is greater than wage income Yw. Accordingly, public deficit spending produces monetary profit for the business sector Qm≡C+G-Yw with C=Yw.

At the end of the period the accounts of the central bank ― which has created the money for deficit spending out of nothing ―, the business sector, and the government sector look as follows.#1

The government deficit spending causes an increase of the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank which bear zero interest.

In the second step, the public debt is consolidated by the issuance of long term government bonds or other types of securities. Government securities bear interest and have normally the best rating, i.e. Triple-A. After the switch from non-interest bearing deposits to interest bearing bonds, the newly created money vanishes again and the accounts look as follows.#2
Government deficit spending does not only produce profit for the business sector. With the supply of government bonds and other types of securities comes a stream of future interest payments.

With the promotion of deficit spending, MMT sees to it that the business sector not only enjoys profit but also a risk-free asset and a long term flow of interest. This flow comes in subsequent periods from the taxation of the household sector and is secured by the taxing power of government.

Egmont Kakarot-Handtke

#1 Wikimedia, Government deficit spending, creation of money
#2 Wikimedia, Government deficit spending, consolidation


Related issues see cross-references MMT