March 20, 2019

The public-debt and private-profit pushers

Comment on Lars Syll/Dirk Ehnts on ‘Public debt — a macroeconomic necessity’

Blog-Reference and Blog-Reference

Dirk Ehnts argues: “The problem stems from the fact that the affluent, which include successful entrepreneurs and capital owners, save relatively more than average or poor households … For this to work out, additional demand would have to be created … The implication of this is that there’s a macroeconomic requirement to run public deficits, founded on a demand gap that arises from households and firms wanting to set aside savings in the form of money … This demand gap cannot be closed but by an increase in government spending and hence debt.”

This is at best a half-truth.

The macroeconomic Profit Law is given by Q≡Yd+(I−S)+(G−T)+(X−M). In order to focus on the interaction between the household sector and the government sector, it is here reduced to Q≡−S+(G−T). Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes.

If the government’s budget is balanced, i.e. G=T, and if the households dissave, i.e. S≡Yw−C<0 Legend: Yw wage income, C consumption expenditures, then the business sector makes a profit, i.e. Q is positive. This is a sustainable situation for the business sector, however, since the household sector’s debt grows, it all depends on how long this can go on which, in turn, depends on the institutional make-up of the banking sector.

If the government’s budget is balanced, i.e. G=T, and the households save, i.e. S≡Yw−C>0, then the business sector makes a loss, i.e. Q is negative. This is not a sustainable situation.

However, if the government’s budget deficit, i.e. (G−T)>0, is equal to the household sector’s saving, i.e. (G−T)=S, then macroeconomic profit Q is zero. This is the minimum condition for the market economy to function. If the government’s deficit is greater than household sector saving, then the business sector makes a profit. This is a sustainable situation for the business sector, however, since the government sector’s debt grows, it all depends on how long this can go on. MMTers claim that, as a matter of principle, sovereign debt can grow indefinitely.#1

So, government deficit spending in excess of household sector saving, i.e. (G−T)>S, makes that overall profit is positive and this prevents the breakdown of the market economy. In other words, the so-called free market economy hangs on the life-support of the State. In still other words, fabulous financial wealth is the mirror image of fabulous public debt ($22 trillion).

It is correct to say that a minimum government deficit, i.e. (G−T)=S, is necessary in order to secure the very existence of the market economy. From a systemic standpoint, the historically evolved economic system has a serious construction flaw. And the claim of the free-market champions that the State should keep out of the economy is suicidal stupidity.

However, as far as the government deficit exceeds saving, i.e. (G−T)>S, this amounts to a free lunch for the Oligarchy. So, in the final analysis, the MMT policy of permanent deficit-spending/money-creation does NOT benefit WeThePeople but the Oligarchy.#2

The public-debt pusher Lars Syll/Dirk Ehnts either do not understand macroeconomics#3 or they are two of Wall Street’s many academic trolls.#4

Egmont Kakarot-Handtke

#1 Some nasty MMT surprises behind the time horizon
#2 MMT Progressives: stupid or corrupt or both?
#3 Keynesians ― terminally stupid or worse?
#4 MMT: The fusion of Wall Street and Academia

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