Understanding Modern Monetary Theory (3) - A Different View of Government Spending

Image credit. Continued from Understanding Modern Monetary Theory (2) - A Different View of Government Spending

Cornucopia - within Limits

Government being capable of spending Dollars ex nihilo and thus not depending on any force outside itself for funding its operations and interventions in society, it is clearly facing fewer constraints than commonly thought. Leaving aside the important question in how far Government spending may fund activities that are detrimental to the economy and the social fabric, and leaving aside the other very important question whether there is a disadvantageous mix of the proportions to which FG and PS are laying claim on society's resources (too much or too little use of society's resources by Government and the private sector, respectively), the most fundamental constraint on Government is imposed on it by the availability of real resources - labour, materials, energy, and technology.

While Government may overspend in that it might 

• create demand in excess of available real resources (inflation), or 

• direct its funds to detrimental purposes (for instance financing the destruction of an economy's energy base or stifling the PS (Private Sector) by elbowing Government into areas where it is rather a destructive and inefficient force),

it can never spend more than it earns. For Government is not dependent on earning anything to be able to fund its actions. Unlike households and firms, who have to earn their Dollars, all Government has to do is create the Dollars it desires to expend.

No Such Thing as a Government Deficit

Therefore, it is rather misleading to suggest that a Government that spends more than it "earns" from tax receipts, is burdened with a deficit - a lack of funds. There is no such lack ofv funds or deficit, as it can always generate the Dollars it needs. 

Rather than creating

• a "surplus" of "earnings" over expenditures, 

• a "balance" between "earnings" and expenditures, or

• a "deficit" resulting from spending more than "earning," 

the Government plays with the Dollar thermostat, so to speak: 

• taking more out of the PS pool of Dollars than putting into it (Government "surplus," in common parlance),

• taking as much out of the PS pool of Dollars as it is putting into it (Government's "balanced budget," in common parlance), or

• adding more to the PS pool than it takes out (Government "deficit," in common parlance)

Government's "Balanced Budget"

What, in common parlance, is termed a balanced budget is, contrary to widespread belief, normally detrimental to the economy. By sucking out of the economy the same amount that Government spending has put into it, the PS is left with zero net savings for the budget year,  - the financial wealth of the PS is the same at then end of the budget years as it was at the beginning. Unless there is a threatening level of inflation calling for some cooling, a balanced budget really imposes unnecessary austerity on the economy.

Government "surplus"

Again, unless there is a urgent need to fight inflation, with the thermostat turned to "cool," a Government "surplus" is a burden even more vitiating to the PS than a "balanced budget." A "surplus" is attained by dragging more Dollars out of that sector than Government puts into it. In order to maintain its living standard maintain their current levels of expenditure, households and firms are forced to draw down their savings from the previous budget year or borrow money.

If Government sustains a "budget surplus" for a longer period of time, the PS will be forced to 

• diminish its economic activities, eventually entering recession, and/or 

• incur heavy debt  that may ultimately prove unsustainable (banking crisis).

Government "Deficit"

By contrast, pumping more Dollars into the PS by Government spending than it takes out from it via taxes, the PS is able to accumulate net savings, increase its wealth, and spend more of its own money in order to enhance economic activity.