Not a day passes by when we don't encounter someone writing that government should cut its budget and start balancing it. This post will add to the body of posts arguing that a government committing to austerity is exactly the wrong policy to enact during a deleveraging and during a general fall in aggregate demand. Since posts calling for austerity and balanced budgets are just reiterating the same points again and again, I will reiterate points I've already made earlier. This post leans 100% MMT.
All income in the economy is money that has been borrowed into existence by someone lese, or else spent into the economy by government. There's no other way for fiat money to come out of thin air. Nobody in the private sector suddenly becomes wealthy, without having gained his wealth from somewhere. Trace every unit of this money all the way to its origin, and you eventually get to a point where it was either created by someone's debt, or by an act of government spending. Government spends money in paying citizens to defend its borders, police its citizens, teach its children, and the various other duties in running the state. Someone takes out a loan from a bank, with a promise to pay it back at some future date, and the bank raises this money from the central bank, which credits the fiat.
A growing economy creates the credit and demand growth necessary to sustain itself without government deficit spending. Conversely, in a depressionary environment, where people are conserving income, credit is withdrawn, and demand is therefore withheld from the economy, we need government to step in and fill the spending void left by the private sector saving. Not to do so would lead to private incomes being destroyed, due to withheld demand, which leads to a vicious spiral of more people not spending, and more demand being withheld from the economy.
And yet, experience shows us that government spends more during a boom than on a depression. They do so because they think of themselves as merely sharers of the currency with the private sector, rather than its issuer. So they spend when they think they have the tax funds, and refuse to spend when they lose the tax base (Though by jumpstarting spending in the economy is precisely how they will recharge the tax base).
There is a stable level of government deficit that promotes growth. It's a deficit level just large enough to create private incomes to make private businesses stable, and willing to hire more people, and thus leading to a positive spending multiplier. Since government spending becomes part of GDP, every $1 of government spending leads to at least $1 of GDP. In order that debt does not grow faster as a percentage of GDP, there should be a positive multiplier effect. So government needs to be careful what it spends money on. A good expenditure would be giving jobs to the jobless providing community services that are currently lacking. This is not a handout, because those not willing to work will not get anything (Thus no inequitable distribution of society's bounty). Without government spending, where would the growing incomes to power private spending initally come from? The state's option to be able to spend more, in place of disappearing private spenders during times of escalating private sector desire to save, is an invaluable lifeline during a severe depression.
Without a growing government debt, there can't be growth in GDP. Government debt constantly grows because when government spends more than it takes in revenues, as during recessions, it's always forced by law or charter to borrow. This is a relic of the time when all its payments in currency need to be backed by gold. Now that the gold standard is long gone, this charter is obsolete. The mechanism to fund deficits could be by purely printing fiat money. If Treasury just credits the bank accounts of fiscal beneficiaries, it can spend without having to raise money via borrowing through the Treasury market.No more need to decide whether to borrow, because the borrowing issue just muddles the issue, and gets people to focus on the debt level rather the efficacy of what the government is spending on. Once countries had decided to let go of the gold standard, they acquired the capability fund government spending by merely issuing more currency. What's now left is for the law, and custom, to recognize this.
P.S. I just want to add this point, for those who fear that increasing government spending will lead to inflation. The point is that there would be no inflation if the private sector is avoiding to spend. Inflation will only arise if there was already a lot of private sector demand, and the government is stepping in to add even more to it. If there's no demand, there'll be no inflation. In fact, if the demand is falling, there would be deflation. Unless someone steps in to fill the void. Same goes for those who fear a crowing our of private sector. No private sector demand, nothing to crowd out. Would that it were true that there was something to crowd out, we wouldn't even be talking about the need for more government deficits.
