December 7, 2017

Selling public debt with Ricardo’s tear gland rhetoric

Comment on Simon Wren-Lewis’ ‘Government debt phobias, and possible cures’

Blog-Reference

Arguing against all kinds of land-related taxes, Ricardo took an emphatic social stance: “Such taxes, therefore, fall almost always upon the necessitous person, and must, therefore, be very cruel.” (Principles, p. 154) Needless to emphasize that Ricardo knew quite well that land taxes are normally not a concern of poor people but appear very cruel to rich people.

As a rule, economists put the poor widow/little guy/hungry child in the foreground and in the emotional limelight when they lack sound arguments. Simon Wren-Lewis is no exception, he abuses the underpaid nurses in order to argue against reducing the public debt. When nurses or babies or pandas appear in an economic/political argument the odds are that the general public is taken for a ride.

The problem with the debt discussion is that it is macroeconomics and macro is scientific garbage since Keynes. The apex of scientific incompetence is microfounded macro. Keynesian macro, on the other hand, and Post Keynesianism and MMT as the latest reincarnation has been based on provably false balances equations.#1 Roughly speaking, macroeconomic profit theory is false and because of this, the whole analytical superstructure is false, and because of this, economic policy guidance lacks sound scientific foundations.

The point everyone can agree upon is “It makes perfect sense in many situations for the government to increase its debt.” Yes, but it should be added that public debt is always a bad deal for the ninety-nine-percenters.#2 The discussion about deficit spending and inflation is a red herring. The disastrous effect of growing public debt is NOT on inflation but on the distribution of income and financial wealth.

Curiously, the word profit does not appear once in Simon Wren-Lewis’ post. Neither does it appear in the contributions of MMTers ― the most outspoken champions of deficit spending and the propagandists of the debt-does-not-matter meme.#3

From axiomatically consistent macrofoundations follows Public Deficit = Private Profit. With deficit spending, the business sector is always better off. The household sector, on the other hand, always holds the bag. It is taxed in real terms in the period of consumptive government deficit spending without realizing it. It is taxed in subsequent periods if interest on government debt is greater than zero, and it is taxed in nominal terms in the indefinite future, i.e. beyond the time horizon, in order to eventually redeem the accumulated government debt.

Neither orthodox nor heterodox economists have figured out how the price and profit mechanism works. Macroeconomics in general and the profit and employment theory, in particular, is provably false since Keynes.

Economists’ care for the poor widow and the unemployed teenager and the underpaid nurse, and the endorsement of popular social agendas is, as a rule, rhetorical window dressing. In particular, if the proposed policy is deficit spending and a permanent increase of the public debt. The macroeconomic Profit Law states Public Deficit = Private Profit. MMT policy, in particular, is a wellness program for the one-percenters which is realized with the help of the sovereign money issuing state and paid for in real terms by the ninety-nine-percenters.#4

Egmont Kakarot-Handtke


#1 Rectification of MMT macro accounting
#2 MMT, money creation, stealth taxation, and redistribution
#3 MMT: The one deadly error/fraud of Warren Mosler
#4 For details of the big picture see cross-references MMT

Related 'MMT is ALWAYS a bad deal for the 99-percenters' and 'Austerity and the utter scientific ignorance of economists' and 'Austerity and the idiocy of political economists' and 'Austerity and the total disconnect between economic policy and science'

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COMMENT on Jure Jordan on Dec 9

You say (i) “State prints its own money. Can you go bankrupt if you could print money?”

No, but that is NOT the issue. Distribution is the issue. If the state/central bank creates new money for the business sector to pay the wages for additional workers and the household sector as a whole spends total income on consumption, i.e. Ch=Yw, then the household sector gets the whole output and the price remains constant if average wage rate and productivity are constant, no matter how much the economy and the average stock of transaction money expands.#1

To produce money in order to enable the autonomous transactions between the business and the household sector is the original task of the central bank, that is, it has to see to it that THE ECONOMY never runs out of money.

If the state issues new money and it is added to consumption expenditures, i.e. C=Ch+Cg, there is a one-off price increase which results (i) in the redistribution of output, and (ii), in the monetary profit Qm=Cg. So, the household sector = ninety-nine-percenters is taxed in real terms via the price mechanism, and the business sector = one-percenters makes an additional profit. The real distribution and the distribution of financial wealth changes.

One can repeat this feat for an indefinite time without inflation. The central bank finances the deficit, and public debt vis-a-vis the central bank grows steadily if it is not consolidated by issuing interest-bearing bonds or other securities. These financial variants do NOT alter the fact that the wage income receivers are period after period TAXED in real terms without realizing it.

The price mechanism is NOT an information system as Hayek hallucinated but the very tool of stealth taxation/redistribution.

(ii) “No country pays off its debt, ever.”

This is a historical fact. But the indefinite rolling over does not make the debt disappear. The problem is simply pushed beyond the time horizon according to the old policy motto ‘After me, the deluge’. The question is what happens if the debt is eventually redeemed. And the answer is that the market economy breaks down.

(iii) “Debt interest is almost never paid by taxes but by new debt.”

True, but this is only ‘After me, the deluge’ with a vengeance. What MMT is in effect saying is, don’t worry, we will pay neither interest nor principal but, when the day of reckoning comes, redefine debt as a gift of the central bank.

The MMT debt-does-not-matter argumentation appeals to the corrupt part of the population. In the political realm, this kind of half-truth/trickery/deception/fraud is standard procedure.* Economics, though, claims for 200+ years to be a science. The real problem starts when academics ignore the separation of science and politics and become the loudspeakers of Warren Mosler’s MMT sales team.#2

#1 MMT, money creation, stealth taxation, and redistribution
#2 MMT: Money-making for the one-percenters

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Source: Twitter Dec 20