Is it necessary, or even desirable, to pay down the debt by balancing the federal budget?

[Clint]

Conventional Economic Theory teaches that a government can only spend what it taxes from its population, or what it borrows. Borrowing, of course, must be repaid, either by the generation that does the borrowing or by their children or grandchildren, according to this Theory.

When the national debt is not paid off, or even paid down, but instead continues to grow, conventional economists begin to compare the national debt to gross domestic product, and make dire predictions about what will happen if the debt reaches this percentage, or that percentage, of GDP.

Those economists, and the politicians who subscribe to their theories, then demand that serious measures be taken to reduce the national debt (or, at least, halt its growth) by balancing the government’s budget.

Most people agree with the concept of balancing the budget (so long as the balancing is done on someone else’s back, and not on their own), because they sense a strong similarity between a nation’s ever-growing debt on the one hand, and an individual’s ever-growing debt on the other hand.

This apparent similarity implies that what cannot work long-term for an individual, likewise cannot work long-term for a nation.

Modern Monetary Theory (1) disputes the conventional theories of debt and deficits, (2) contends that the apparent similarity between the budget of a nation and the budget of an individual or household is a flawed similarity, and (3) suggests that nations balance their budgets at their peril.

One of the currently-popular teachers of Modern Monetary Theory, Professor Stephanie Kelton
of Stony Brook University, presented the following chart in one of her lectures in early 2019.

She was in Week 2 of her lecture series, Rethinking Fiscal Policy, at UCL Institute for Innovation and Public Purpose in Britain. The chart she presented shows seven attempts by the U.S. government, over the past 200 years, to pay down debt by running a federal government surplus.

The surprising negative effect of all these attempts was depression.

One instance of a depression following immediately after a period of budget balancing could logically be chalked up to coincidence. When the same sequence of events happens again and again, the pattern that emerges strongly suggests cause-and-effect.

Here is Prof. Kelton’s chart (taken as a screen-grab from the Youtube video of her lecture).

And here is a LINK to her Youtube video.

[Falstaff]

Thanks for your vid @Clint - MMT is interesting - I’ll come back on it later - but in the meantime there is one question which I think is very important.

"Every Country in the world owes money - So who do they owe money to ? " (this was true a few years ago - nowadays “China” may be an exception but the rinciple of teh question remains)

[ontario]

@Clint

Conventional Economic Theory teaches that a government can only spend what it taxes from its population, or what it borrows. Borrowing, of course, must be repaid, either by the generation that does the borrowing or by their children or grandchildren, according to this Theory.

In 2020 economists and central bankers discovered that Central Bank balance sheet can expand indefinitely without any harm to Central Bank or government :D. Basically this is modified version of MMT which doesn’t create weird thing in government or central bank balance sheets. As you can see government and central bank generate and exchange liabilities of each other (government bonds and national currency are both liabilities) through open market. Same as if government would simply order central bank to print currency for them.

Also, there is no solvency constraint for the government or central bank on the debt nominated in national currency (since central bank can buy public debt in any amount and print currency) except inflation, the only solvency condition is that present value of all debt nominated in foreign currency should converge to 0.

[Falstaff]

@Clint

Conventional Economic Theory teaches that a government can only spend what it taxes from its population, or what it borrows. Borrowing, of course, must be repaid, either by the generation that does the borrowing or by their children or grandchildren, according to this Theory.

@Clint

Modern Monetary Theory (1) disputes the conventional theories of debt and deficits, (2) contends that the apparent similarity between the budget of a nation and the budget of an individual or household is a flawed similarity, and (3) suggests that nations balance their budgets at their peril.

The approaches you mention are failing fundamentally to be addressing the same problem !

As far as I can see there are 5 approaches to economics and tehy are ALL tied to Politics - starting from the “Left” we have ;

• a - Marxist Economics - Every aspect “Centrally Planned”
• b “Modern Monetary Theory” - Govt is in control of the “macro side” and just spends money as it likes on the basis that “money is not real anyway”
• c Keynsianism - Govt spends money by debt in “Bad Times”, and pays down the deficit in “Good Times”
• d Conventional or “Classical” Economics - Little interference - but is poor at explaining “the business cycle”
• e the “Austrian School” - Complete “laissez faire” - non intervention - explains the business cycle (It is the ONLY one which does !) - but poor at “Social welfare issues”

c,d and e all assume that “Money has value”
b assumes that it is purely for the convenience of politicians and many would be surprised to realise just how close it comes to “Marxism”
e Assumes money has an inherrent value and is operated as though we were still on the “Gold Standard”

I know that @JohnScott has extolled the virues of e in a recent thread an I would invite him to participate here.

in the meanwhile here is a discussion from a few years ago between MMT and “Austrian” devotees - I was surprised just How much “Banking” has changed in those 6 years !

It is also notable that the “Professor” you link to (& the MMT Guy in this link) - both just assume that “Total Government control” is both good and desirable and that we can use debt to finance unlimited Social and Health care issues without real consequence.

I would guess she is a Democrat - since that appears to be their current view as well - and probably a “Globalist” as well.

However MMT Cannot be used in a “globalist world” and as we have already seen, The adoption by Greece, Italy, etc of the “Euro” has devstated their national Economies because they cannot devalue or “float” their currencies - since they are stuck completely in “Euro Zone” - There seems to be little chance of a recovery for many of teh “Euro nations” - assuming ‘Ceteris Paribus’

so that’s where we seem to be at the moment.

@JohnScott said that current workings of teh monetary system (USA) simply transfer wealth from the poor to the rich by inflating (he uses a different word) asset values like property and share values in monetary terms.

I can see some merit in this argument - however I can also see that when the asset values get extreme - the “Plebs” will be demanding income rises - so they can now afford some of these assets - Causing IMO - massive inflation and a deflation of confidence in the underlying currency - which is likely to defeat the lady’s argument entirely !

However her “New thoughts” will render her in high demand on teh “Lecture circuit” and in book sales. - Perhaps she and MANY of the other “progressive thinkers” - are just Gaming the system to increase their own personal wealth ?

It seems to me that MMT is a form of “Postmodernism for money” - ie deny logic and common sense - and work on feelings and “Justice” !

Mark my words “It’ll all end in tears”

[Darrinatkins]

Whom do we all owe to? And by we I mean countries.