1 Ikus http://bilbo.economicoutlook.net/blog/?p=31681.

2 Ingelesez: “... the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years. That view has crippled progressive thought ever since and is antithetical to MMT. The debate also has resonance with the current leadership struggle within the British Labour Party about fiscal deficits and the claims by the ‘socialist’ candidate, Jeremy Corbyn that he will “balance the budget” when unemployment is low so as to avoid inflation. This view derives from the adoption by progressives of Keynes’ views, whether they know that or not. It is a mistaken view and retards progressive policy development.”

3 Ingelesez: “In his 1961 book article (page 139) – The Burden of Debt – the founder of Functional Finance – Abba Lerner opened with the following parable:

“But look,” the Rabbi’s wife remonstrated, “When one party to the dispute presented their case to you, you said ‘you are quite right’ and then when the other party presented their case you again said ‘you are quite right’, surely they cannot both be right?” To which the Rabbi answered, “My dear, you are quite right!”.”

4 Ingelesez: “In correspondence to Sir Richard Hopkins (July 20, 1942) – which is recorded in his Collected Works, Volume 27, Keynes wrote:

… the ordinary Budget should be balances at all times. It is the capital Budget which should fluctuate with the demand for employment.

This is the precursor to the modern concept of the ‘golden rule’, which limits fiscal deficits to the rate of public investment in productive capital. The ‘golden rule’ essentially means that over some defined economic cycle (from the peak of activity to the next peak) the government deficit should match its capital (infrastructure) spending. All ‘recurrent’ spending (that is, spending which exhausts its benefits within the current year) should be ‘funded’ through current revenue (taxes and fines, etc.). The ‘golden rule’ is considered equitable across generations because the current taxpayers ‘pay’ for the public benefits they receive now, while the future generations have to pay for the benefits that the infrastructure delivers to them in the years to come. Thus, day to day spending that benefits the current taxpaying public should be covered by taxation revenue and capital infrastructure should be funded through debt. The fiscal balance would thus always be zero net of public investment spending. The ‘golden rule’ reflects the mainstream economics view that governments have to ‘fund’ their spending just like a household.”

5 Ingelesez: “So in Victorian times, the ‘golden rule’ was that in good times, the current ‘budget’ should deliver a surplus, which would then allow the government to repay the debt incurred in bad times, when it was running deficits. This reasoning then lef to the conclusion that balanced ‘budgets’ as a principle was dangerous and that ‘budgets’ should, rather, be balanced over an economic cycle.”

6 Ingelesez: “The point is that I depart from the view espoused by many Modern Monetary Theory (MMT) proponents who suggest that Keynes is one of the important precursor economists to the development of MMT. As I explained in this blog – Corbyn should stop saying he will eliminate the deficit – there is no foundation in the idea that fiscal balances should ever be balanced much less over the course of some discrete economic cycle (peak to trough to peak).

Keynes’ views in this context were relatively conservative and mistaken.

1. Issuing debt to match fiscal deficits does not reduce the inflation risk of the initial spending, whether that spending be government or non-government.

It just swaps one financial asset – a saving balance (deposit) for a government bond. Moreover, the latter carries an income flow which is likely to be larger than the former.

2. There is no reason to believe that continuous fiscal deficits will be inflationary. Extending Keynes’ own logic, deficits are required when non-government spending is insufficient to generate sales that would justify firms fully employing all available labour.

As long as firms can continue to respond to nominal demand growth through increased output growth, there is no major likelihood of an inflation breakout.

In other words, a deficit could easily be a ‘steady-state’ policy position to support full employment when the other sectoral balances (external and private domestic) were in particular states.”

7 Ingelesez: “For a nation such as Britain, we note the following:

1. A fairly sizeable external deficit which drains domestic spending in net terms (more cash flows out via imports than flows in via exports) and is not going to go away anytime soon and is not a problem anyway, given it means the British people enjoy advantageous real terms of trade (foreigners are willing to send them real goods and services in exchange for bits of paper – financial assets).

2. The private domestic sector is already highly indebted and cannot be expected to sustain even higher debt levels.

3. There is considerable idle capacity – unemployment, underemployment etc.

In this context, a continuous fiscal deficit is indicated.”

8 Ingelesez: “Governments should not follow fiscal rules like a ‘balanced budget rule over the cycle’. Rather, they should be guided by evaluations which show the impact of different fiscal policy parameters on the well-being of the population. If there is a need for the private domestic sector to have less purchasing power,then a tax increase is indicated. Not to generate revenue for the government but to reduce purchasing capacity of households and firms.”

9 Ingelesez: “The tax increase is serving a specific function – to deprive the private domestic sector of purchasing power, presumably, because the government wants extra real resource space available to pursue its own socio-economic mandate and/or exports are booming. It needs to create the extra resource space because if the taxes weren’t increased there would be incompatible claims on those real resources from all the claimants (households, firms, government, foreigners) which would result in inflation.”

10 Ingelesez: “… no rule can be devised to automatically ensure that these functional decisions will be made effectively. It is the art of the policy maker that rules rather than a rule driving the policy. Keynes did not take into account the sectoral balances. MMT makes them a central part of the macroeconomic evaluation and policy development framework. Understanding them in an accounting sense is only the first step. The art is to understand what drives these balances and how they interact. So a ‘balanced budget over the cycle’ rule would mean the private domestic sector has a deficit equivalent to the external deficit on average over the same cycle. Why is that desirable? It implies that the private domestic sector will be accumulating ever-increasing debt levels, which eventually will become unsustainable. MMT focuses on the private debt dynamics and considers the public debt dynamics to be passe. It goes further and recommends that governments break the nexus between debt-issuance and fiscal deficits.”

11 Ingelesez: “In this sense, governments should use Overt Monetary Financing rather than going through the pretence that they are being funded by private bond holders. The bond sales are made possible by past deficits, which generate net financial assets for the non-government sector. Further, they are just an example of corporate welfare, which is totally unnecessary. There is some progressive argument that the debt helps pension/superannuation funds provide safe returns to workers in retirement. My solution would be to national superannuation funds, eliminating the managerial fee grab of workers’ savings, and using the government’s currency-issuing capacity to fund workers’ retirements. That is pure MMT but very non-Keynes.”

12 Ingelesez: “… you might also like to reflect on David Colander’s article in the Journal of Economic Literature (December 1984) – Was Keynes a Keynesian or a Lernerian? – which mounts the argument that Keynes shifted ground in the 1940s and considered Lerner’s Functional Finance to be a sound framework.”

13 Ikus http://bilbo.economicoutlook.net/blog/?p=31681&cpage=1#comment-40885.