Tag Archives: MMT Post Keynesian

“Look after the unemployment, and the budget will look after itself ” (Keynes 1933). Is he still right?


(This article was first published in Liberal Democratic Voice)

Keynes was undeniably a genius of his time, but he wasn’t infallible. We should not just assume that he was always correct. As with all prolific writers we can cherry-pick quotations to suit our own political purposes. If we want to argue for more government spending, we can use this:

“For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income.”

(Collected Writings of John Maynard Keynes, Volume XXIX, pp 80-81)

Keynes meant that the mere supply of a commodity is not enough to ensure the sale of that commodity, but money from all government spending inevitably ends up in someone’s pocket. This is a statement of the obvious, maybe, but he evidently felt it needed making anyway. On the other hand, if we are suspicious of what sounds like “magic money tree” economics, as many scathingly describe any deviation from their understanding of ‘sound money’, we can find this quotation:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

(Economic Consequences of the Peace, Chapter VI, pp. 235-236)

Rather than play these games we might look at how economics has progressed since his time and interpret his comments in the light of the now available evidence. This Huffington post article makes a good a case, in support of Keynes’s opinion, that a healthy economy will help minimise the government’s budget deficit.

One possible counter argument, from those of a more right wing disposition, would be that it is unclear which is cause and which is effect. Does a healthy economy with low levels of unemployment, and underemployment, naturally produce a small budget deficit or is it the other way around? If we force the budget to balance, by draconian measures, will unemployment fall too? A quick glance at the figures for Greece is enough to eliminate that possibility. It has a relatively modest budget deficit of 3.5% but an unemployment rate of over 25% with no tangible sign that any fall is imminent.

To give an answer to the question posed in the title, we can say “usually yes”, but we must acknowledge there are several, sometimes conflicting, factors involved. It is possible to conceive of a healthy economy with low levels of unemployment at the same time as the government’s budget deficit possibly being a little on what some may consider to be the high side.

To understand why, we need to look at the sectoral balances. To start with, imagine that everyone who issued or used the pound sterling as a currency was separated into either the government or the non-government sector. The assets of the non-government sector have to equal the liabilities, or debts, of the government sector. If money is paid as tax to government the assets of the non-government sector fall exactly as the government debts fall too. We can then divide up the non government sector into domestic and international. So in one year, and using the terminology of internal deficit for the Government’s deficit:

Internal Deficit = Savings of Domestic Sector + External Deficit.

For Keynes to be right on the question of unemployment and the internal deficit it should follow that everyone will save less when unemployment is low. This is a reasonable assumption but there could be exceptions. Everyone is more likely to borrow too, essentially the same as de-saving, when the economy is buoyant and there is confidence that money doesn’t have to be stored for those rainy days ahead. The effect on the external deficit is harder to predict. If the UK reflated its economy, when everyone else was in recession, we could well see that, even as unemployment fell, the external deficit, and so the internal deficit, could increase due to a local upturn sucking in more imports. Exporters could also switch their production to local markets. In that sense, and if we interpret “look after itself” to mean “fall”, Keynes could possibly be wrong! The important thing is that governments should understand these relatively simple relationships to make informed policy choices. The internal and external deficits may not be such a problem as we might be led to believe, if international investors see the UK as a safe place to park their surplus cash. The number one priority for any government, at least in peacetime, should be to ensure the health of the economy, both to offer jobs and business opportunities for all citizens and at the same time maintain the confidence of our external investors.

Ironically, if the UK lost that confidence, no-one would want to lend us any money. The pound would fall. Imports and exports would have to balance. We’d all end up somewhat poorer and we couldn’t then afford to save so much. The internal deficit would have to fall too and maybe even turn into a surplus. But, we have to ask ourselves: “Is this what we really want?”

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Unfunded Promises? No such thing!

All Govt spending  comes back as taxation eventually. Where else can it go? So, there’s no such thing as “unfunded promises” or “unfunded spending”.  Now that the UK’s election campaign is well underway we are hearing  accusations along the lines that their opponent’s sums “don’t add up” ,  or “they haven’t done their costings properly” . It is  from both sides. It’s not just the right wing that doesn’t understand how money flows in the economy. Labour is just as bad, and maybe even worse, than the Tories at the present time.

Money arrives in the economy when government spends it in and leaves the economy when government taxes it out. More can’t leave than arrive for other than a limited amount of time. It’s physically impossible.

The government doesn’t tax it out because it needs the money. Why would it? It’s created it in the first place. The UK government hasn’t adopted the euro, the UK government still has total control over the issuance of its own currency. It’s like saying a theatre needs to collect its theatre tickets because it needs the tickets. Or the Post Office needs to collect back its stamps because it needs the stamps.

The government imposes taxes to cancel its stamps and tickets – effectively. It does that to prevent high inflation in the economy. So, providing inflation is under control, government spending can be allowed to rise – especially if there is slack in the economy and there is an unemployment and underemployment problem. If inflation isn’t under control spending needs to be trimmed back or taxation increased.

If we are worried about the future economy that our children will live in, we only need think about the one we live in now to know what the real worries should be. What do we thank or blame our predecessors for? We thank them for the railway network, the road system, the health service , the education system etc. We blame them for some of their past environmental practices which mean that rivers have to be cleaned up, buildings which should be white are actually black with accumulated soot, some of their slipshod practices over the disposal of nuclear waste etc.

Do we worry about the ‘debts’ they accumulated? Not at all. They are of no consequence to us now.