Folks, Larry is trying to make a point, which is well taken: there's no hard cap on the flow of gov't spend. There just isn't one!
On the other hand there is a flow chart of analytical approach and the circumstances of reality (which, for us, rests upon the Open Economy route). I'm going to go through A1 A2 and B1 B2 so read this, if you wish. At the end I note the implications for planning Gov't spending so that actors can see the economy as a predictable scene. A pressing issue is that the research agenda for economics is too narrow, and misdirected. The enclosed screenshot shows where we should take research. I agree with Larry on this.
A or B. Is the economy closed, or open to capital flows, & currency exchange flows?
A If closed, & then, is it 1 Fixed Exch Rate or 2 Flexible? All are flexible now except N. Korea and those pegged to another currency eg Zimbabwe.
A1 As a fixed exchange rate, closed economy, they would be OK with their autarky, except they want to buy imports, beyond what their exports will buy, and they do a lot of horrid black-money transactions, including selling (and transporting) female and male labour for factories and restaurants in China's territory, taking a cut of this Foreign currency and using that to buy the imports the Military Gov wants. Here, the N. Korea case illustrates Larry's p oint that Gov decides on the allocation of a whole lot of resources other than money, here Labour under national socialism but in many cases the Offices and Rental Properties of Gov't.
A2 (there are no such economies) - A closed economy with a flexible exch rate only exists as an imagined economy. Here the flow outward of reserves can occur if 'our' interest rates are too low vis a vis 'their' interest rates. To stop this flow you have to have Capital Controls. But if we imagine that Gov't keeps spending a whole lot of money it can either use the Bond Market to re-raise this money, selling bonds, mopping up the money, which works fairly well (as long as the bond market is closed (? no such exists)); in other moments like deflation it can buy bonds, release money that way, thus influence the price of bonds and the interest rate for lending. By the way, if you try to close down bond markets, they will just reappear. In 2014 John Lewis and a few others created Company Bonds, which recreated a bond market without the banks getting in the way. This mopped up money more cheaply than the banks would lend to John Lewis. John Lewis made good use of this money. Its workers partly co-manage the company, and get dividends.
A2 as imagined is what a simple Conservative Economist thinks UK Has been doing:
QE: Buying bonds pushes the Price of bonds upward, and the interest rate for lending downward, and this is the current Conservative Govt and ECB strategy.
They agree on it, yet they haven't dealt with the fact that it's an open economy, so let's now take up B. (They just try to get their neighbours to agree to the same policies; this would recreate a larger Closed Economy if it worked.)
B Suppose now the economy is open to capital flows as well as trade. [it does not matter here if it's open to labour migrants.]
B1 Open economy with a fixed exchange rate. The fixed exchange rate is only viable if the Gov is holding enough Reserves of relevant currencies or Gold to use its liquidity to support the fixed exchange rate. [again, this is pretty much hypothetical. Explore it:] This would be obvious but the situation is complex, due to possible Interest Rate differentials. These arise, over the border, due to our Inflation rate and our interest rate responding to domestic conditions such as energy scarcity, price of wind or any other major input to production.
One rule for such an economy is: the interest rate has to exceed the inflation rate. The current interest rate in UK for example, being so low, seems to suggest a real deflation of prices. E.g. 0.25 core interest rate, -2% core deflation rate.
Another rule is that if our interest rate far exceeds the interest rate for the same product (or a deal, e.g. a Business Loan, which here is around 8% per year) outside our borders, then someone will just borrow from outside.
This is why ECB puts so much Pressure on UK gov to conform to the EuroCentral Bank money and inflation targets. And this is how Greece got stuck conforming to a wider range of insistent policies that EuroCommission imposed, saying 'These policies are associated with the ECB money rules'.
ECB was doing Quantitative Easing, which was itself bond purchases, and it could not afford part of the Eurozone to cancel any of its loans, or default. Indeed, it could not afford the 'haircut' (so it said) that Greece was threatening. That's a kind of 5% or 10% default on a package of loans.
B2 Open economy with a flexible exchange rate. This is the UK case. The USA case is slightly different as its economy is so large. To some extent (as we see this week with Yellen's threat of a raising of the interest rate), the USA can try to act "as if" it were a closed economy because it is so large relative to its outside trading partners that it can try to lead the market.
B2 In the UK or Turkey case, the country's exchange rate moves if inflation goes up. So it depreciates. Turkey with its wars had this situation for over 20 years. Also during deflationary times, like up to 2015 in UK, the currency gradually appreciates, making imports look attractive. These movements keep markets seeming settled over the short term. But in government terms, if we now want to reflate the economy, we DO need to keep track of total spending and its possible effect on the following: Direct effect on price of goods, indirect effect on bond prices and hence interest rates, and indirect effect on the price of property. (The current policy is to inflate property prices via the Quantitative Easing, keeping interest rates low.)
B2 Open economies have runs of flows in and out of the country. Because of the fluidity, there's a quick response to events. For example at the moment hedge funds are finding they can't make the profits they did earlier, so they run around the open economies seeking opportunities. A new, small restaurant chain in Manchester and London is bought by a Private Equity fund, it then expands into the empty capacity of other closed stores; it opens 20 more restaurants across the country, & tries out Ireland, too; the money for this investment is coming from Abroad where it's cheaper, and it makes a loss. It may close the chain later. Or it can crush the workers' wagerates, many are being turned from Contracts to Zerohours, crushing workers' Hours.
Open economies do not, or cannot, restrict the flow of capital. People can move capital easily. Capital-ists can choose the dark internet or carry cash on an airline. They can also use gold moved via uninspected containers of traded goods. They can of course also use the hedge funds, stock markets, buying from abroad but this is restricted internationally by some laws that require the larger transactions to be reported. Just reporting a transaction tends to slow it down. Further cut is taken by the intermediary, eg stockbroker, who by taking a tiny % cuts into the profit margin, perhaps 0.2% fee. These are parasitic on the open economy.
If gov't introduces a Financial Transaction Tax, it will both reduce these intercountry flows on the official lines of Stock Market and Bond purchases over country borders, and also straight away enhance the use of the Dark Internet and the tax havens to manage securities sales. But FTT is a great idea leading gradually toward positive money. (not suddenly)
Open economies struggle to control our interest rates.
That is why it is very important to keep the UK negotiations going with the EU, and preferably UK to remain part of the EU while arguing the case for more Country policy room-for-maneuvre.
Perhaps if you see flaws in this you can let me know.
WHAT TO DO NEXT?!
The most important thing though is that we need to know what Gov plans to do. Gov would best announce its 7-year plan for money spend and the Total spend by Region is very important within Britain. That helps to create expectations given that we have mainly private-sector construction managers and a LOT Of Euro (private and EU) money going into construction. There is now even Japanese and Chinese money going into construction. (I am not sure this is at all wise. If your property belongs to other countries, they will soon begin to say they have a national interest in your terrain and your policies.)
Over a 7 year cycle have targets for spending based on the *Input-Output table. This table shows what is spent by each sector, including gov't, on all other sectors an on itself. Here we can show what we plan to do.
Observe the interest rates, inflation rates, construction starts, success or failure of Gov't to spend what it has planned to spend, each year. Adjust the 7-year plan in a staggered two-yearly cycle.
Do NOT create a third tier of spending, perhaps Regional Spending, unless committed to doing a full regional decentralisation of specific Govt tasks, so that' it's clear why you are going to all that trouble.
Thank you for comments.
Wendy Olsen *http://www.ons.gov.uk/economy/nationalaccounts/supplyandusetables/datasets/inputoutputsupplyandusetables
For a quick glimpse of the 2 levels of UK Gov't spending as a 'final consumer', see this attached screenshot in Facebook. It's in the Heterodox Economics group, which you can easily join.
https://www.facebook.com/groups/heterodox
This message was sent from Wendy Olsen
Social Statistics Discipline
(and Cathie Marsh Institute)
Room G20 Humanities Building
University of Manchester
Manchester M13 9PL
Next big events: Sept. 12-13th we are in Panel 1, Labour as Method, at the DevtStudiesAssoc. in Oxford. our talk is at 2 pm in Magdalen College common room.
Facebook group on Integrated Mixed Methods Network, all welcome (it says 'closed group', just ask, and you can join) QCA TRAINING is ongoing.
________________________________________
From: email list for Radical Statistics [[log in to unmask]] on behalf of Dr L Brownstein [[log in to unmask]]
Sent: 13 September 2016 09:27
To: [log in to unmask]
Subject: Re: Gov't need for taxation - and for selling bonds
The economic analysis would serve as data input, but the decision will rest on socio-political grounds.
larry
Dr L Brownstein
[alt-e:] mailto:[log in to unmask]
From: email list for Radical Statistics [mailto:[log in to unmask]] On Behalf Of John Bibby
Sent: Tuesday, September 13, 2016 9:21 AM
To: [log in to unmask]
Subject: Re: Gov't need for taxation - and for selling bonds
Thanks Larry. I think your answer lies in your statement that "the government does not have to decide on total expenditure, only on what to fund and how to distribute the funding in order to best utilize the non-financial resources at its disposal. These are political decisions .... ".
In saying "these are political decisions", do you mean that economic analysis and data have little or no role to play? It seems to me that they are vital, especially regarding the phrase that I have underlined.
JOHN BIBBY
===============
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On Mon, Sep 12, 2016 at 10:17 PM, Dr L Brownstein <[log in to unmask]<mailto:[log in to unmask]>> wrote:
John, the problems engendered by neoliberalism/neoclassical economics can be shown by data. You are just unfamiliar with the literature. I mentioned one experiment in macroeconomics, which is rare, that tested three theories of money. Most macroeconomic issues are usually tested by what are known as natural experiments. Osborne conducted one, and the empirical results are plain to see.
The government does not have to decide on total expenditure, only on what to fund and how to distribute the funding in order to best utilize the non-financial resources at its disposal. These are political decisions and different societies decide on their funding priorities in different ways.
When you know how government funding works, and know that it has an unlimited pot of money at its disposal, then for said government to say that it can’t fund X because it has not got the money, this must be interpreted as being delusional or a lie because the statement is empirically false.
larry
Dr L Brownstein
[alt-e:] mailto:[log in to unmask]
From: email list for Radical Statistics [mailto:[log in to unmask]<mailto:[log in to unmask]>] On Behalf Of John Bibby
Sent: Monday, September 12, 2016 9:04 PM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: Gov't need for taxation - and for selling bonds
Larry asks "Why should the government stop funding the NHS or severely restrict such funding?" and tells us " The reason .... that the government doesn't have the money, is a lie."
But if we agree that this reason is a lie, his question remains unanswered. How DOES the government decide (a) what its total expenditure is, and (b) how it is divided up between different areas?
JOHN
PS: I have been rather shocked at how the relatively small empirical questions I originally posed relating to cash-payments & demand control have triggered highly non-empirical and emotive reactions about privatisation, neo-liberalism etc. etc., etc..
===============
Yorkies!: Please come along to any of the following groups that I am involved with:
* MathsJam!: 7pm on 2nd-to-last Tuesday each month: Royal Oak, Goodramgate: www.<http://www.>MathsJam.eventbrite.co.uk<http://MathsJam.eventbrite.co.uk>
* York Left Discussion Group: 7.30 on 3rd Thursday each month; Royal Oak, Goodramgate: www.YLDG.eventbrite.co.uk<http://www.YLDG.eventbrite.co.uk>
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On Mon, Sep 12, 2016 at 7:58 PM, Jeff Evans <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Larry, thanks for these helpful posts on the need for taxation, etc.
One issue that I don't think has been much mentioned is ... the government also raises money by issuing bonds. Are you implying this is unnecessary?
If it is necessary, as long as these are for sale internationally, the government depends to some extent on perceived comparative attractiveness of their bonds, and other "market perceptions" - e.g. that it wil repay it obligations on time, does it not?
Jeff
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-----Original Message-----
From: email list for Radical Statistics [mailto:[log in to unmask]<mailto:[log in to unmask]>] On Behalf Of Dr L Brownstein
Sent: 12 September 2016 14:49
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: "Free at Point of Delivery" - what are the alternatives?
John, Jay is right. I am not suggesting abolishing taxation. In addition to redistribution, taxation forces those using the system to use the national currency because taxes can only be paid in it. So, taxation is necessary.
Hence, taxes will always be with us. Whether they are high or low is primarily a political decision. Were there a way other than through universal taxation to force everyone to use the national currency and to achieve distributive goals among other things, then in principle taxation could be dispensed with and the government would still have the financial resources to pay for whatever it needed. Taxes do not pay for anything.
Governments implement them for other reasons as mentioned. This was reasonably well understood in the 1930s and 1940s.
What you refer to as the common sense reality is based on what neoclassical economists have been blathering on about for decades, that a government is like a household. And this is what is taught in introductory econ courses.
Nothing could be further from the truth. What a government does and a household is not allowed to do is to issue the national currency that enables financial transactions to take place. Since this national currency is not tied to a commodity, like gold, for instance, which is finite, or pegged to another currency, there is no financial barrier to the government spending as much as it thinks it needs to. There are non-financial limitations on how much a government can spend, primarily what human and natural resources are available to it along with the level of unemployment.
Provided these resource are available, government expenditure can be extended indefinitely. Since there are no financial limitations, and the requisite human and natural resources are available, why should it stop? For instance, why should the government stop funding the NHS or severely restrict such funding? The reason that has been given, that the government doesn't have the money, is a lie.
The goal of any government should be full employment and price stability, which was the goal of many governments during the Bretton Woods period. This did not change immediately after Bretton Woods was abandoned. But neoclassical economists continued to bombard government and other institutions year after year, from the late '40s and early '50s onward, that what was important was the money supply, the proper control of which through market forces would inevitably lead to full employment and price stability.
Government interference would inevitably muck this up, hence, had to be prevented from interfering in this process. Their narrative became the dominant one after the 1970s and we can see where this has got us -- many small crises and one large one, which we are still suffering from due to Osborne's mindless implementation of austerity policies.
In the neoclassical narrative, inflation became "the bad thing" that had to be avoided and monetary policy, the setting of interest rates, had to take precedence over fiscal policy, which should be avoided as much as possible.
However, contrary to this, monetary policies are weak and crude, while fiscal policies can be dexterously directed where necessary. Fiscal policies can be used deliberately to generate employment, while monetary policies cannot be used to bring this about, except accidentally. Carney recently more than hinted at the limitations of monetary policy and practically told Hammond that the ball was now in his court, the fiscal policy court.
This is a case where what is felt to be common sense is misleading, just as can be found in other fields. For example, common sense tells us that the ordinary objects surrounding us like tables and chairs are solid whereas they are mostly empty space. What common sense is telling us here must be the case is in fact false. The same holds for 'the household is like a government' analogy. The analogy does not hold.
larry
Dr L Brownstein
[alt-e:] mailto:[log in to unmask]<mailto:[log in to unmask]>
-----Original Message-----
From: John Whittington [mailto:[log in to unmask]<mailto:[log in to unmask]>]
Sent: Sunday, September 11, 2016 11:58 PM
To: Dr L Brownstein <[log in to unmask]<mailto:[log in to unmask]>>; [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: "Free at Point of Delivery" - what are the alternatives?
At 23:31 11/09/2016 +0100, Dr L Brownstein wrote:
>John, it is easy to get away from the notion that general taxation is
>the most practicable system when it is seen that taxation does not fund
>anything. .... once it is understood that the government can pay for
>anything they wish to in their own currency ... This would be the only
>fair way, surely, to deal with the bottomless pit.
To a non-economist, that sounds like an incredibly academic/theoretical viewpoint which does not seem to correspond with common sense realities.
I think I must be misunderstanding, since you seem to be implying that all taxation could be abolished and the government could still pay unlimited amounts in order to adequately fund all the required public services, simply by printing the necessary number of banknotes. I find it extremely hard to make any sense of such an idea!!
Kind Regards,
John
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