Re: Keynesian State of the Union

[Bill Mitchell <ecwfm@xxxxxxxxxxxxxxxxxxxxxxx>]

Bill said:

> >>
> >> We have to break this notion that government spending needs to be
> >> financed.
> >

Paul D. replied:

> Financed yes-- the question is of funding if deficits are incurred for it is
> the funding process that provides financial assets for the private sector to
> hold in stead of money directly.

I think this misleads. The usual macro analysis of this issue is within the
Govt Budget Constraint
framework which suggests there is an ex ante financial constraint on
government spending. This
false analogy with the household (the user of the currency) then sets up a
range of spurious arguments
about the viability of net government spending.

Government spending does not need to be financed.

Using this terminology is unnecessary and misleading and brings the
discussion back into the
parameters set by the orthodoxy. Those parameters are not helpful.

If the government wishes to provide financial assets to the private sector
it has that choice but that
is an act of monetary policy (rate support) not fiscal policy (spending).
There is no real imperative
on the government to worry about the portfolio options available to the
private sector. The private
sector still have choices including disposal of the money stocks as
spending flows, for example.
In that case,  net g spending can be lower and full employment maintained.

If at full capacity, and if the government made a political decision to
expand their share of GDP then
they may be concerned with levels of private spending driving the economy
into an inflationary episode.
They may use higher interest rates to subdue private spending (not a good
choice) and issue debt to
support those new targets. Otherwise, it can simply tax more.

best wishes
bill




------

William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle
New South Wales, Australia
E-mail: ecwfm@xxxxxxxxxxxxxxxxxxxxxxx
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