The curious thing about Simon Wren-Lewis’ argument is that it does not contain the word profit. It goes without saying that this omission makes the whole argument worthless.
Simon Wren-Lewis’ argument is based on the underlying standard model. This model is provably false and therefore has to be rectified first.#1
As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw, the price is given by P=W/R, i.e. the market-clearing price is equal to unit wage costs. This translates into W/P=R, i.e. the real wage is equal to productivity.
Profit for the economy as a whole is defined as Q≡C−Yw and saving as S≡Yw−C. It always holds Q≡−S, i.e. the business sector’s profit is equal to the household sector’s dissaving, or, the business sector’s loss is equal to the household sector’s saving.
(i) Now, if the government runs a deficit in period 1, total expenditures are C+G, the market-clearing price rises, and the business sector makes a profit Q=G. The output O is redistributed between the household and the government sector. This amounts to taxation in real terms which is brought about by the price increase.
(ii) The banking system consists alone of the central bank. So, profit takes the form of deposits at the CB. The business sector’s deposits are equal to the government’s overdrafts. For a start, there is no interest on deposits/overdrafts.
There is no longer deficit spending. The price returns to its original level.
This intermediary time lasts from period 2 to t−1 and the government’s debt is simply rolled over. If employment and/or productivity increases, the economy grows.
(iii) In period t, the debt is redeemed. The government taxes the household sector, total expenditures reduce to C−T with T=G, the market-clearing price falls, and the business sector makes a loss of −G. After the government’s repayment, both overdrafts and deposits at the CB are again zero.
As a result, the grandchildren are hit by taxes T but get the whole output O. The business sector’s loss in period t is equal to its profit in t=1. The real taxation happened in t=1, but nominal taxation is deferred to period t.
If the interest rate on overdrafts is, for simplicity, equal to the interest rate on deposits, the government sector taxes the household sector, and the interest payments go to the business sector respectively the firms’ owners a.k.a one-percenters.
The taxation/redistribution over the indefinite intermediary time and the final taxation and redemption in period t could be avoided by immediate nominal taxation in period t=1. Immediate taxation settles ALL issues of intertemporal redistribution and is, from the perspective of the ninety-nine-percenters, preferable to deficit spending and deferred taxation.
From the government’s perspective, stealth taxation through deficit spending is preferable because nominal taxation vanishes behind the time horizon. From the business sector’s perspective, profits now and losses behind the time horizon are also preferable.
So, let the next administration worry about permanently growing public debt.#2
#1 On the saying “We owe the debt to ourselves”
#2 Keynes, Lerner, MMT, Trump and exploding profit