Yves here. Richard Murphy provides a useful, layperson-friendly explanation of why political bromides that treat national budgets like household ones are all wet. Please circulate widely.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future.
Politicians claim countries must be run like households, and that’s completely wrong. In fact, most often, the exact opposite is true.
This is the audio version:
And this is the transcript:
The household analogy is the curse of the political explanation of the economy. Let me explain what I mean.
Politicians – and Rachel Reeves is a master of this – like to explain the way in which the nation’s economics work by comparing them with a household. And there is simply no such comparison to be made.
A government is quite literally nothing like a household when it comes to economic understanding. The politician who uses the household analogy, as Rachel Reeves does when she talks about her mother balancing the household budget every month by checking the bank statement, is making a false comparison that is, to be candid, completely and deliberately misleading. So, I want to explain what the household analogy is, and why it’s so inappropriate.
The first and most obvious point to make is that governments are not like households, and there are a number of reasons why. The first and most obvious one is that the government owns its own bank. Not only does it own its own bank, that bank is actually the creator of all the money in the economy.
The problem that the politician who likes to talk about the constraints upon the government because there is no money is referring to the idea there is no money left in the economy, the credit card is maxed out, the overdraft limit has been reached, and everything else. But that isn’t true when you own your own bank.
When you own your own bank, you simply tell them to up the limit.
Or, as is the case with the UK government and the Bank of England – and has been the case, by the way, since the 1860s – if Parliament passes a Bill that says the government will spend, then the Bank of England is legally required to make the payment whether or not the government has any money in its bank account or not. It simply increases its overdraft.
You haven’t got such a facility. Rachel Reeves’ mother didn’t have such a facility. But Rachel Reeves, as Chancellor of the Exchequer, has got such a facility. This is the difference between a government and a household.
One has a bank. One does not have a bank. One uses the currency that is created for the nation as a whole. That is the household. The other creates the currency for the nation as a whole. That is the government.
And what is more, the household might have to balance its books – because it eventually could run out of money if it doesn’t, or it could go bankrupt – but the government can’t. Because the government actually has to make the money for everyone else to use.
In other words, it has to run a deficit. And this is what politicians, it seems, do not understand. Unless the government runs a deficit via the Bank of England, then the Bank of England is not injecting new cash into the economy. And without new cash injected into the economy, two things can’t happen.
One, inflation cannot be controlled because inflation demands more money, and if you do not inject more money into the economy to manage the fact that we think that overall a low rate of inflation is good for the economy, there is not enough money to meet the needs of society.
And secondly, growth requires that there be more money in use. And if the government doesn’t supply it, it has to come through extending private sector debt. And we know that private-sector debt is much more vulnerable to failure than public-sector debt. In other words, the government has to run a deficit, whereas a household does not.
I hope by now you’re already getting the idea that these things are different. But this isn’t the only way in which they’re different. There’s another major difference. A household can dispense with expenditure, and it has no further consequence for the household.
So, for example, if I suddenly find that I’m very tight and I need to reduce my spending, I can cut out all holidays. It has no further consequence, bar the fact that I’m going to spend a week or two sitting around at home, rather than going to sun myself or whatever else I wish to do, wherever I want. That’s it. We cut the cost, we don’t have to worry about the consequence for someone else. That’s what a household economy can do.
But a government can’t behave in that way. If the government decides to cut its expenditure, somebody else’s income falls. So, if the government decides to cut, for example, payments on the winter fuel allowance, the money available to pensioners to spend decreases. As a result, there is a reduction in the growth in the economy for which the government is responsible.
That’s not the case if the household cuts its spending. Its income doesn’t fall as a consequence of cutting its spending. But when you are the government, your income falls if you cut your spending. And the two are directly related. And that’s clear from economic theory. And yet, it doesn’t seem as though any minister actually understands this fact, because they keep on talking about the fact that we need to cut our cloth to suit our availability of resources, or whatever it is.
It’s all nonsense. In fact, they are so inept about this point that they don’t seem to understand that government spending actually increases growth automatically. Now, that, again, is not true of a household. If I overspend, I don’t increase my income.
But if the government spends more – just as if it cut its income, there’s less in the economy – if it spends more, there’s more in the economy. These two are directly related.
It’s not surprising. The formulas that are used to calculate gross domestic product, our measure of national income, actually reflect the fact that government spending is a part of national income. And if the government increases its spending, and there are resources available for it to spend money on, then that will increase our overall level of growth. That is not true of the household. It is true of government.
There’s also another big difference, and that’s when it comes to debt, if a household borrows money, it does have to repay it. That’s the way it works. It goes to a bank and says, ‘Can I have a loan?’ And the bank says, ‘Yes.’ And then the household is obliged to make the repayment over time. If it doesn’t, it could go bankrupt.
The government is in a totally different situation. It borrows money, and it, first of all, borrows by and large on much longer time periods than the household does. Households, except for mortgages, tend to borrow money for only a few years at most, whereas governments can borrow for periods of up to 70 years in the UK at present. And secondly, when the government gets to the end of the loan period It doesn’t have to repay the debt. What it does is simply issue a new debt to replace the one that it wishes to replace. It rolls the debt over, in other words.
This is how the national debt has continued since the 1690s, when it first began. And over that period, there’s never been any serious attempt to repay the national debt, thank goodness, because otherwise, we wouldn’t have a big enough money supply to sustain the modern economy. Instead, that debt has been allowed to roll over whenever it comes due for repayment. And the sum has simply increased.
There’s another misunderstanding with regard to this debt as well. If someone, let’s suppose, dies owing money, then in the household, that reduces the value of that person’s estate. Very clearly, they have a liability that is due to someone. That’s fine.
But in the case of the national economy, when the government owes money, somebody else owns it. And most of the ownership of UK debt is within the UK economy. Not all, but the part that is not owned within the UK is balanced by the fact that people in the UK own the debt of other countries. So, overall, the situation balances out. Broadly speaking, the total value of government debt owing by the UK government is matched by government debt owned by people. And when we look at this equation, what we see is there is no burden for future generations as a consequence of the government creating debt, because there’s an asset to match it.
The lucky children in our society will in fact inherit a part of the national debt because their parents own it, or their grandparents own it They will get an asset. This idea that the national debt is a burden on every child now alive is completely wrong. It will, in a sense, be a burden on some because they will not inherit the asset to match that debt. But, even then, they’re never going to repay that debt. It’s just going to be rolled over. So, this idea that household debt and government debt are the same thing is completely absurd.
There’s also an intergenerational dimension to this, of course. Because there is a transfer between generations as a consequence. It isn’t the case that future generations are going to repay our debt. The real issue is, will sufficient people inherit our debt? So, the government has a responsibility with regard to debt on an intergenerational basis, but the responsibility is to control excessive ownership of that debt through the management of excessive wealth. And I think that’s a point that, again, is very little understood. This is not an issue for households, but it very definitely is for the government.
So, what we’re coming up with is this absurd idea that there is somehow a similarity between households and governments when there’s no similarity at all.
In fact, let’s also look at the situation of what happens when things hit bad times. In a household, in a bad time, there will be a serious attempt by the householders to cut their spending, to balance their budget, which is what we have also seen governments try to do. That’s what we call austerity. But actually, in bad times, the government has a duty to increase its spending.
Why? Because the private sector isn’t spending and households are reducing their spending, and therefore there’s a recession. And the only way to stop that recession is for someone to act counter-cyclically, as it is said. In other words, for somebody to start spending, even though the economic messages being sent out are that we are in a downturn. And the only agency capable of doing that is the government. So, the government has to behave in the exact opposite of the way in which the household does.
And by and large, that’s true of pretty much everything I’ve said about this household analogy. If the household thinks it’s a good idea to do something, pretty much you can say the government should do the opposite. Because they are the opposite of each other. The household is the microcosm of society. The government is the macrocosm of society. Its job is to manage the overall scene and to compensate for what goes wrong at the household level. It must take the opposite action to ensure that, overall, there is balance within the economy for which it is responsible.
When we have governments who believe they must behave like households, we get exaggerated downturns, we get exaggerated booms, we get credit cycles which don’t work because there’s too much credit at one point and too little at another, we get interest rate cycles which are destructive, and we get serious economic downturns, unemployment, and so on.
We don’t need any of that, if only the government understands its job is to act as a government and not as a household. Would someone like to tell Rachel Reeves? Because it’s really important that she begins to understand this right now.
43 comments
Comments are closed.
I might be, as the author states it, inept but I would like to introduce another argument into the discussion. And it has to do with where the article states “…the difference between a government and a household. One has a bank. One does not have a bank…”.
I live in France, which currently has very serious financial problems. France is a member of the EU and in Euro currency area. Which means that, although France is a country, it does not have its own bank in the sense that it controls its own currency. It is beholden to the ECB and the Euro and EU rules that constrain the actions of its central bank.
As far as I can see, this lets some air out of the author’s balloon. I would really like to see his reasoning on how a Euro country can get out of a financial quagmire on its own. Because, in my -probably inept- mind, a Euro country does indeed look a bit like a household under tutelage of the moneymasters in Brussels that determine their credit card limit.
“As far as I can see, this lets some air out of the author’s balloon.”
I disagree. In what I acknowledge is a very simplistic view, the financial relationship between the EU and its member nations is much like the US federal government and the 50 states (without the massive input and control the EU has on member nations’ budget and fiscal policies). Individual states can have serious budget issues that can’t be resolved by central bank type remedies, much like member nations of the EU. Obviously it is much more complicated, but it comes down to being able to control the amount of money in the economy.
If anything, the EU situation you raise further proves Richard Murphy’s point. I think the mistake is having a view of EU member nations as independent economic entities that have central banks. This issue is raised in your second paragraph, but does not seem to understand how it further proves the position being presented. A final example that drives this point home – do you really think Brexit would have stood a chance if the UK used the Euro? While current economic conditions are bad in part due to leaving the EU, leaving in the first place wouldn’t have been possible if they had abandoned the Pound.
Thank you and well said.
I wrote my masters on central bank independence, 1994 – 5, and partly addressed this loss of autonomy, i.e. countries not having their own monetary sovereignty.
Hombre: “I would really like to see his reasoning on how a Euro country can get out of a financial quagmire on its own.”
That is by design, control is Centralized. You are not financially free to do as you please.
urdsama: “do you really think Brexit would have stood a chance if the UK used the Euro?”
All the more reason why people of Britain voted for Brexit. You can’t have a minority of people benefiting from globalization, who primarily live in the urban areas, drive the standard of living of the majority, who primarily live in the rural areas, into the ground by opening their markets to cheaper foreign agricultural products and expect the majority to just sit back and go along with it. No amount of propaganda or public shaming by calling rural people backwards was going to change that outcome.
It seems to me that the author is clearly speaking about countries who have monetary sovereignty and whose debts (all or a large majority) are denominated in the currency they issue. That is the case of England, USA, and many other countries.
In countries that don’t have monetary sovereignty, the debate should first be how to achieve it. That is the case of EU countries as you mention, but also of many countries in Latin America and Africa.
Although similar in the sense of not having full sovereignty in monetary policy, each of those countries has its particularities which demand different courses of action.
Take Argentina as an example: they have a currency that the central bank issues, but it is a weak currency, their economy is extremely dollarized and the government has huge dollar denominated debts. So despite having their own currency, they also have a colossal external debt to deal with. Argentina is different from African countries that use the franc CFA, which don’t even have a national currency at all. And they are both different from the EU.
So in short, each country will have to come up with their own strategy on how to achieve monetary sovereignty. In the case of west African countries, the strategy has been that of military coups against western/french alligned governments, the creation of political, military and economic alliances between themselves and an improvement of relations with Russia and China.
Time will tell what will be the path chosen by Argentina and the EU members.
The cases you outline (which are excellent, by the way) demonstrate the concept of degrees of monetary sovereignty. A nation has the maximum degree of monetary sovereignty when it is the sole issuer of its own currency, does not issue debt denominated in any currency other than its own, accepts only its currency in payment of its taxes, fees and fines, and allows its currency to “float” freely — never pegging it to any commodity nor foreign currency.
Any nation which operates without one or more such conditions has a reduced degree of monetary sovereignty, and the more conditions violated, the lesser the degree of monetary sovereignty.
The author is talking about countries that have their own fiat currencies, which excludes France and other EU nations as you point out.
He has long advocated that if Scotland was to go independent, it should immediately create it’s own fiat currency to replace Sterling, otherwise it will be unable to control its finances.
They cannot with the current treaties and agreements,,,,ah but I forgot they did during 2008 Great Financial Crisis and Covid, This piece in 1992 by Wynne Godley · Maastricht and All That explains it simply:… you cant devaluate https://www.lrb.co.uk/the-paper/v14/n19/wynne-godley/maastricht-and-all-that
Thanks for this. I hate myself for being so slow in understanding this stuff. I had a Director of Studies in Economics at Cambridge who always spent the final 5 minutes of the hour telling us “OK that stuff was for the exam…. here’s the reality”. He was MMT before MMT was a thing. He was also incredibly interesting because he was old school 1990s Scots nationalist.
He accepted his highly privileged place in society but clearly wanted to ignite a fire in people like me to force change. I miss people like him :(
It can’t. Yves has explained multiple times that euro entry was a one way street. The minute people think you want out, your economy collapses. There isn’t even the COBOL/Fortran programming ability to properly and quickly resurrect defunct currencies to work in the modern banking system. I had to learn Fortran to do my PhD …..it’s tough….really tough…..
FORTRAN is a GREAT language, and vast swathes of engineering/scientific code still run on it – pretty much all oil/engineering/chemical/whatever industries use it for the following reasons:
* when the majority of the code still used (huge mathematical libraries like NAG) people really cared about getting it right:
* it’s been around long enough to be very debugged
* complex numbers were a built-in datatype (equivalently optimized and debugged code is not available in virtually any other language).
* it’s stable – stuff I wrote in 1982-6 for my PhD still compiles with virtually all modern compilers with no change.
FORTRAN FTW.
I learned a little bit of WATFOR, which was the University of Waterloo’s version of FORTRAN back in 1982. Good times!
The only thing I would add is that these politicians aren’t “inept” by any means. They know really well what they are doing, and the household analogy is just the packaging they use to sell austerity to the public.
Behind these decisions in fiscal policy there are objective class interests that want to make huge profits at the expense of the majority of society.
Disagree heartily. Most people totally believe the household analogy, I have no doubt about that. They are totally inept – at least in this regard. Lying and grifting in other ways? Sure.
I am very grateful for this article. Like Terry Flynn, it shames me that I am understanding this stuff so late in life. This gives me language and men’s to explain it to others.
IMHO it’s tactically unwise to start the conversation with the claim that government can’t be limited by money because they are bank and can print whatever amount of money they want. While true, normal people automatically think printing money is bad, so you immediately put yourself into disadvantaged position, and then you have to explain inflation, which is another fraught subject.
Better to start by pointing out contradictions in the system as presented by its priests. For example one good point, mentioned in the article, is that government “debt” isn’t being paid off, will never be paid off and isn’t meant to be paid off. In fact even if states would adhere to the various debt breaks laws, the actual number in government debt column would still be rising exponentially. Which means what is called government debt isn’t debt as normal people understand it, because the whole point of debt is that you have to repay it eventually. What household can spend more than it earns year after year, while the only debate between mom and dad is about how much more debt they add to the existing pile, but never worrying about paying it back?
Then it’s easier to offer alternative explanations why things work out in practice, even if by the official theories they absolutely should not.
For me the “Aha!” moment was learning about the Sectoral Balances Identity. The national government deficit is identically equal to the sum of the national private sector surplus and the external sector surplus (which is approximately the trade deficit). The private sector wants to be in surplus, and (taking US as example), US has a structural trade deficit. The US government cannot help but be in deficit.
Private sector decisions (how much to save rather than spend and how much to import rather than make domestically) control the national government deficit much more than the government’s fiscal tax/spend policies.
This isn’t even MMT, it’s just national accounting. But learning about it was very helpful. Many MMT theorists think that the government fiscal policy should try to accommodate private sector savings preferences, and so does not shy away from deficits when that is what the private sector wants.
It’s not true that Governments can print as much money as they want with no restrictions. The key restriction is the ability of the economy to make good use of the money. The primary limit on government spending is the potential for inflation, which occurs when the economy reaches full employment and there are not enough real resources (like workers and materials) to meet the increased demand created by excessive government spending; essentially, the only constraint is the availability of real resources in the economy, not the ability to create money
Another gambit is to try to break people’s habit of confusing a spreadsheet for the objects its entries represent — what I call the difference between “spreadsheet land” and “real resource land” or “spreadsheet world” vs “molecule world.”
The map is NOT the territory — it’s real resource availability (including labour) which dictates what a nation can do, not ledger entries.
Failure to grasp this distinction lies at the root of grievous miscalculations like, “the West’s GDP is huge compared to Russia’s, so it will prevail in Ukraine!” Sorry — GDP composition matters, and the tyranny of distance is real …
Of course whenever there is a government “hole” in the budget, there is talk of how it must be balanced so cuts are made to pensions or social welfare or heating subsidies for pensioners in the winter time. But if there is need of money for the Ukraine or Israel or Tierra del Fuego or say money for defence contracts & spooks, then the money just appears, just like magic. And yet people do not seem to catch on and believe the next story of a hole in the budget when it comes up.
I’ve often thought that this is an example of what I call “Aristotelian” thinking, ie (with all due deference to the Greek Bearded One) thinking by reasoning from principles rather than by verification from facts. For example, reasoning tells us that heavier objects should fall faster than lighter ones, and indeed if we drop a silk scarf and a metal belt from a tall building the belt hits the ground first. It’s very hard to twist our brains into thinking that, in a vacuum, there would be no difference in speed, because all logic and rational argument seems against it. I still remember the shock I felt seeing the Apollo astronauts letting a feather and a hammer fall to the ground, and seeing them arrive at the same time. It still seems intuitively wrong, even if it’s been demonstrated.
MMT is like that: it may be true but it’s counterintuitive. After all, we know that households and individuals can’t consistently spend more than they earn, and we can’t understand, intellectually, how it could be different for nations. That’s why I think Bill Michell’s presentation is easier, because he starts from the premise that governments are limited in what they can spend by the availability of things to buy and the economy to supply wants, but not otherwise. I find that people shy away from MMT not just, or even mainly, because the don’t understand it, but because they can’t imagine the possibility that it may be true.
That is a great comment!
The other problem is that every single person first encounters money in the form of an object — usually coins. This is a very powerful anchor framing which is extremely difficult to shake, even though sovereign currency is a ledger system, NOT a pile of objects.
Then most people spend the rest of their lives utterly convinced that their experience as a currency user is sufficient to understand the sovereign currency system of which coins and notes are merely tokens. Intellectually it’s as sound as assuming your experience with household light switches and electrical sockets is sufficient to understand the operations of the entire Hydro grid and system. News flash — such “experience” is woefully inadequate …
Murphy speculates that if his financial situation suddenly became tight he would have to give up on some holidays. How about if you suddenly lost your job and had no salary in your foreseeable future. I guess that would mean no holidays for the rest of the year. The real meaning of a family is that everyone in the family is an important person and that being a part of a family means that everyone should be responsible for everyone else. If my adult son is injured and cannot work, I will try to help support his family during that time. And, this may mean that I will have to give up on some holidays. The first and most important responsibility of a family is to try to protect each other from more powerful sources. And that is also the first and most important responsibility of governments. The analogy that is wrong and immoral is the comparison of the government to a business. A business employee that is not carrying his load will be fired. A family and a government cannot be doing that. I do not need an article like this to tell me that the US government is serving 330 million people and my family is only serving 4.
You have stumbled upon an insight which reveals why the whole electoral trope “we need more businessmen in government!” is grotesque.
…more an illumination than a stumble. ;)
From the writer, “The first and most obvious point to make is that governments are not like households, and there are a number of reasons why. The first and most obvious one is that the government owns its own bank. Not only does it own its own bank, that bank is actually the creator of all the money in the economy.”
That reminds me of when Donald Trump when he said, “We have nuclear weapons, why don’t we just use them?” The MMT community, is so focused on debt being not debt that they don’t see it as what it actually is, meaning an indicator of economic health. When we look at the US economy historically we can see that after WWII, with the economy restructured by the New Deal, economic growth in the US averaged over 4% per year with the national debt shrinking as a percent of GDP. Then as corporations and the wealthy took their power back from governments, changes like deindustrialization, tax cuts and deregulation happened. We saw real growth slow to an average of 3.2% from the start of the 70s, to the end of the 90s. Then as Neoliberalism took greater hold of the economy, economic growth has been further reduced, averaging 2.2% since 2000.
When the economy slows, governments help out by deficit spending. The US national debt went from just under $1 trillion in 1980 to $5.7 trillion in 2000 and is now over $36 trillion.
To me this information is a sign that changes made to the economy over the last 40 years need to be re-evaluated. To some economic thinkers, it calls for us to focus on if we should really worry about debt because we can make our own money. Imagine coming upon a person who is bleeding profusely and one person claims that with his new thinking he can pump blood into the patient ad-infinitum; while the other says, maybe we should check for wounds and fix them – then we won’t need to keep pumping blood.
My GDP numbers are from BEA.gov and the debt numbers are from https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
This fallacy is difficult to dislodge. I’ve tried on an investing Discord a number of times to explain, but ultimately I’m not convincing anyone and have not been successful at doing so. People believe hard, never ask why. These are people with big cash piles, so not a representative sample of the general population. Those that might benefit from material benefits the most, perhaps could be more persuadable.
It would be great if Richard could do a companion explanation on tax… how tax does not fund public spending in any way, but does help to define the sort society in which we live, or would like to live.
Taxation was used to move from wealth based on aristocratic land ownership and rents, in favour of investment in developing early industries and manufacturing. Taxing the landed rich did not get rid of landed aristocrats, but it did promote moving money into the Industrial Revolution and the building of the working class.
Tax is about removing unproductive wealth, money, as a corollary to public spending as a way to creating distributed productive wealth across a broad section of society.
Remove unproductive money (and destroy it). Create money, wealth, and put it where it works in the interests of the majority.
Tax the rich in favour of the poor. Or, tax the poor in favour of the rich. Both are about wealth redistribution. It is a choice.
So we need to tax the ultra wealthy, etc, to undermine rentier financial capitalism that creates nothing materially except austerity for the poor in favour of the rich… in favour of creating the public investment in new industries and services that make real things and jobs and a wider distribution of wealth.
Taxing billionaires will not pay for the NHS, we can just do that as Richard explains. Taxing billionaires plus destroying the engines of privatisation is about ending the drivers of austerity and creating new drivers.
I’m sure Richard, and others, could put it better. Prof Michael Hudson is brilliant on all this in his The Destiny of Civilization: Finance Capitalism, Industrial Capitalism or Socialism.
But it does need spelling out, discussing, developing. Most on the left left, the real left, still seem bound up accepting the Thatcherite/Blair/Starmer/Reeves argument that tax pays for spending. It doesn’t.
Richard writes between 2 and 4 blog entries every day at http://www.taxresearch.org.uk !
See some of his videos on tax: https://www.taxresearch.org.uk/Blog/videos/tax/
“The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals’ attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.[1] The paradox of thrift is an example of the fallacy of composition, the idea that what is true of the parts must always be true of the whole. The narrow claim transparently contradicts the fallacy, and the broad one does so by implication, because while individual thrift is generally averred to be good for the individual, the paradox of thrift holds that collective thrift may be bad for the economy.” – Wikipedia, 24JAN2025
“Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable…. But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence…” – Malthus, as quoted by John Maynard Keynes.
In my unqualified opinion the bear-pit the author skates over is inflation. Yes, I dare say there are many of ‘We, the people’ who accept at face value the household budget analogy to government finance but too often I have heard those that did challenge it on the ground that the government unlike a household can print the money it needs, put down with the response from above that pumping new money into the economy like that just causes inflation, which does make a logical sense it’s hard to challenge.
Hence the debate has to move into the rarified topics of supply-and-demand, interest-rate setting, saving-v-spending-v-investing &tc even PhDs (Econ) squabble over and we the plebs are told by our betters that, well yes, government finances aren’t the same as household finances but if we proceed on the basis that the same principles apply we can muddle through.
The author seems to believe that politicians spouting the ‘household budget’ analogy to justify savings and cut-backs are merely ignorant and I’m sure many are, but Chancellors and Ministers have teams of professional and hopefully expert specialists behind to put them right so that those like the current right-wing ones in New Zealand (and the current President of the USA) who all too obviously know the price of everything and the value of nothing (h/t Oscar Wilde) are being deliberately disengenuous if not downright dishonest when using the analogy to justify budget cuts.
Martin Wolf, chief economist at the Financial Times, once wrote that MMT is true but that we can’t let the politicians or the electorate find out. They can’t handle the truth and would overspend, he thought.
I once asked Grant Robertson, finance minister of NZ at the time, about MMT and he replied along the lines of Well, only the USA can do that. He was mixing up MMT with Reserve Currency concepts. He could have been lying but I suspect that he was being lied to by the expert teams (sarc).
Wolf’s observation has the whiff of the aristocrat, doesn’t it? If I recall correctly Mankiw likewise long ago admitted that while deficits are meaningless it were better that politicians not realize this — that, like religion the belief that they matter would curb their impulses.
They, and those of their ilk, are antidemocratic to their core …
Somehow this article and most of the comments remind me of the final verses of “The Gods of the Copybook Headings” by Kipling:
“…
On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: “The Wages of Sin is Death.”
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew,
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four–
And the Gods of the Copybook Headings limped up to explain it once more.
9
As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!”
Could someone illustrate this theory for me by explaining in simple terms how control of its currency made Weimar Germany, or indeed the UK in the 1970s, an economic success? I feel that I’m missing something. Not even being sarcastic.
Just to answer about Weimar would take too long, but briefly it was politics that brought it down, e.g. excessive reparations demands by France, or “even with the stalemate betwen the coalition partners, the fall of govenment could have been avoided. Reich President Hindenburg could have [enabled] Müller to resolve the issue of unemployment contributions by presidential decree. Ebert had supported Stresemann with this device [in 1923]. Hindenberg [would extend] it to each of Müller’s successors – completely undermining parliamentary government in the process. But in early 1930 … Article 48 was denied to Müller. With no way out of the government crisis, the Chancellor [resigned]. It was the beginning of the end for the Weimar Republic.” (“Hitler 1889-1936: Hubris” by Ian Kershaw, p.323)
The UK is a special case, the main industry is financial control/grift/colonialism. To admit that MMT is valid would cause loss of control over foreign countries and their resources.
Wait, what? If a household cuts its spending, then it would not have any impact on anybody else? Hello, we live in a consumer based economy. If enough people chose to stay home, the travel sector will have to cut jobs, likewise if you don’t go to the store to buy goods, then eventually stores will close down and jobs will be cut. That’s what happens during a recession right? Rather than making YouTube videos, then perhaps Richard Murphy needs to open a pub or two in England and see how the real world works. Oh right, pubs have been closing left and right in the UK and it’s the government’s fault for not subsidizing boozing!!! Sweet Jesus!!
IMHO, in the end both households and governments will have to live within their own respective limits. What limits are we talking about? How about physical resources? Either we live in a Finite World or we don’t. The government can print money at will, but it can’t print physical resources like oil or more wind or more clean water. If there are no physical limits, then the whole field of economics itself is junk, because after all it’s based on the concept of scarcity, in which case Richard Murphy should not have had his current job in the first place . Think about it, if there’s limitless oil, it should not matter to oil producing entities whether they produce X barrels of oil at the price of Y as opposed to 2X barrels of oil at the price of Y/2. Heck that that further to 3X barrels of oil at the price of Y/3, etc, etc. According to one Links article the other day, back in the 1970s, the government tried to increase the amount of conventional oil produced in the States to no avail, the number or rigs increased dramatically, but oil production continued to fall. And now, shale oil seems to have peaked also ………… despite the US government printing money left and right.
Money is used by people to buy goods and services, full stop. I just love how the whole real world limits get twisted into who can and cannot print money. I mean, if the government isn’t subject to real world limitations, then households should just forward their bills to the local government, who will cover any shortfall, like why should households be subjected to non sense restrictions? Heck, why not take a step further, why not have a body that sits on top of world governments like say the United Federation of Planets because if a single government is not enough, then a God Level Interplanetary Government Entity should do the trick right?
If just one household cuts holiday expenses, the whole economy will be unaffected. Of course when everyone cuts, then the economy tanks and capitalists will call it recession.
You are right that the real limit are real, physical resources. But that’s exactly the point of MMT. Money is just accounting unit, so for example the question is if there is enough food to feed children/pensioners and enough electricity to keep them warn. If the answer is yes, then it’s nonsensical to claim we can’t do it because of “money”, which is literally unlimited resource. It’s like as if you had factory with enough material and labor to make 1,000,000 widgets and customers lining to buy all of them, but your accountant would start claiming you can make only 500,000, otherwise you risk running out of numbers and then really bad things would happen.
‘How can I be broke when I still have plenty of checks?’
Circa pre-20th century humor…
The idea that a physical currency issued by a sovereign country can be without limits was tested around 100 times in the 20th century, and utter failure of said currencies was the verdict each time via hyperinflation.
We are at an interesting spot presently in that the specter of inflation is everywhere in the world-not just relegated to a few countries that printed too much currency.
There hasn’t really been much in the way of hyperinflation since we did away largely with the physical presence of money, because its all hidden away-not evident to the public that something is very wrong because physical currency only makes up a tiny percentage of all monies-it’s largely a non factor.
$36 trillion in ‘computer cash’ debt is equal to 360 billion Benjamins, and if those were circulating, everybody would know something was dreadfully wrong in the state of den mark to model, but its merely a number bandied about-we don’t see the damage done and thus it doesn’t register all that much in our minds.
In past episodes of hyperinflation, you needed a prop be it coins in the ‘Kipper und Wiper’ era in the 1620’s, or banknotes in the guise of Continental Currency or French Assignats and others since.
There is no prop skulking in a computer-so how do we get there from here?
I’m curious as all get up to how the deal goes down, but am clueless to how it happens…
…stay tuned
@Wukchumni
Yes, Zimbabwe for example is an awful warning. It printed money as if there were no tomorrow. And first the Zimbabwe dollar failed because of inflation, then its replacement the (gold-backed) Zig did the same.
But that was not due to MMT but corruption, incompentence and US sanctions.
MMT does not propose an unlimited money supply, but let me put it another way round: if you want the conomy to grow, you need to expand the amount of money in circulation – find me a country that has grown without expanding its money supply.
Could the author explain this part:
The real issue is, will sufficient people inherit our debt? So, the government has a responsibility with regard to debt on an intergenerational basis, but the responsibility is to control excessive ownership of that debt through the management of excessive wealth.
in the paragraph:
There’s also an intergenerational dimension to this, of course. Because there is a transfer between generations as a consequence. It isn’t the case that future generations are going to repay our debt. The real issue is, will sufficient people inherit our debt? So, the government has a responsibility with regard to debt on an intergenerational basis, but the responsibility is to control excessive ownership of that debt through the management of excessive wealth. And I think that’s a point that, again, is very little understood. This is not an issue for households, but it very definitely is for the government.
Tucked very neatly and innocuously into that entire explanation was the clause “and there are resources for the government to spend money on”.
Therein lies the fallacy of unlimited growth. Sooner or later those resources are not to be had, be they natural resources, human resources or intellectual resources such as art and music.
For example, if a country puts its entire human population to work making paperclips, there is no one left to make music or art. Sooner or later the person who might have been the world next Beethoven dies and all his potential work is wasted making paperclips. Even renewable resources — especially nature itself — are limited.
In fact I would argue this is the entire problem with capitalist economic theory, made into a tiny subordinate clause in the entire author’s work.
I agree that government spending is not like household spending, even in a socialist economy. But resources cannot just be created by the push of a button, even if the money chasing those dwindling resources can.
And I’m sure the author knows this. But the concept of limited resources is deliberately undersold in his work.
And this is why corporations cannot be allowed to control economies such as is the case in the US. They have no concept of limits.