Responsible Fiscal Policy through Functional Finance IS Possible
On April 18 2016, Brookings Institute hosted "the Initiative for Policy Dialogue (IPD) and the Foundation for European Progressive Studies (FEPS), in partnership with the Global Economy and Development program", hosted a public discussion on “How can fiscal policy be growth-promoting and an anchor for macroeconomic stability?” They featured remarks by my favorite economists; Joseph Stiglitz, Massimo D’Alema, Jason Furman, Stephanie Kelton, and Ralf Stegner. The panel was chaired and moderated by Brookings Global Vice President Kemal Derviş. The webpage open:
"Fiscal policy has proven to be an effective way to stabilize macroeconomic growth and reduce the amplitude of the economic cycle. When used repeatedly, or excessively, however, it can lead to high levels of public debt that can undermine expectations of macroeconomic stability and so reduce or reverse the impact on growth. Getting the balance right is therefore critical in designing an optimal fiscal policy to support long-term growth." [Brookings]
Fiscal policy is currently restrained by our Privateering Private Banking System, moderated by Central Banks who govern the money supply in the interest of the private banking system -- and of "monied interests" who often wield massive power through their control of credit and ownership of properties directly or indirectly through debt.
The Debate
Mr Kharas, the chair, opened the discussion by noting:
"There is a sense that many of the traditional policies for dealing with these kinds of issues, monetary policy may have run its course, certainly is looking to be a bit less effective than before. Many calls for structural reforms, but some concerns that structural reforms are not quickly initiated. And then, of course, a lot of discussion about fiscal policy and fiscal rules and can we do more with fiscal policy to sustain growth." [Brookings]
Ex Prime Minister of Italy Dalema noted:
"I will focus on the economy without forgetting the political context. A new approach, a deep change is needed. That's my opinion. Either we are able to sweep away austerity policy or European project itself risk to fail. That's the real situation." [Brookings]
I've talked to people about the Banking system in both Europe and the United States, and both are setup in such a rigid way that austerity is pretty much guaranteed for the smaller countries, such as Greece, and in general for the entire system. The same has been true in the United States and many other countries. Kelton summarized the problem with a quote from John Maynard Keynes:
John Maynard Keynes ... said, "The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes." [Brookings]
That is as true now as it was then.
Fiscal Stability Requires Tax Fairness To balance the books
Dalema notes:
"The priority is to reestablish a progressive taxation system which would encompass several socioeconomic dimensions and goes beyond the specific need for a progressive personal taxation. We need indeed to aim at a more fair distribution of labor and capital income within a country and across countries. We need to tax financial rents and to reduce taxes for business aimed at creating new jobs. Finally, and related to this, we need to fight tax avoidance, tax competition, across countries, and issue already raised at the onset of the crisis, but somehow forgotten and badly overlooked, which bears huge implication on welfare and overall on the political legitimacy of our family, progressive." [Brookings]
For any country to have a stable system, it must have a fair system. If inequality is constantly rising, that in itself will destroy any system that is depending on markets and market participation. To balance the fiscal books those with privilege from a monetary system must pay enough taxes to discourage hoarding and mitigate the effects of greed and privilege. At the same time Government spending is key to the kinds of investment that are needed. Dalema notes that private spending is ineffective absent public investment. "The public investments are the key to mobilize also private resources."
Fiscal Policy means Balancing the Real Economy
Stephanie Kelton made the following remark:
"This requires first and foremost dispensing with the convenient but mistaken idea that governments, like households, must balance their budgets." [Brookings]
This doesn't mean that Governments can "just print money" or that there are no constraints on them. But it does mean that Governments can and should have the ability to focus on what is needed for the economy, the country as a whole, and are not constrained to operate as a mere household, or even exactly like a private business. But it does mean that most public policy folks get the causality backwards on budget deficits and the economy.
Budget Deficits are the Result of Economic Weakness not the Cause
Kelton makes a surprising statement:
"Unfortunately, policy makers have been conditioned to think of things the wrong way round, viewing widening budget deficits as the cause rather than the result of weakness in the real economy." [Brookings]
Functional Finance
Kelton quotes Keynes Again:
"You will never balance the budget through measures which reduce the national income. It is the burden of unemployment and the decline in the national income which are upsetting the budget. Look after the unemployment and the budget will look after itself." [Brookings]
The point here is that Government spending is not merely a drag on the economy, but vital to have a fully functional economy.
Value of Sovereign Money
Kelton brings the discussion back to the value of direct spending investment in fiscal priorities.
for nations that spend, tax, and borrow in their own non convertible fiat currencies there is the potential for a radical break from the prevailing economic wisdom that promotes shared sacrifice over prosperity enhancing investments in our people and planet. [Brookings]
The money invested in an economy by the Government, directly, debits Government spending accounts, and credits the money supply. It expands the money supply, and thus stimulates much more production and spending than the amount of the money supply itself. There should not be a need to sell treasury bonds to cover such spending. The notes themselves are a debt. They just happen to also be legal tender and useful to people who hold them. So they need not be "convertible" to anything but economic goods in the economy through the economy. If folks don't want to spend the money, then they should be required to pay it as taxes.
Unbalanced Borrowing and Spending Destabilizes
The German Mr. Stegner, talked about the pros and cons of his countries economy and noted that "It is economic common sense that a general level of under investment leads to an increasing decay of destruction of capital formation." and that Germany has been suffering increased inequality and a stagnation in capital formation, as well as underinvestment and disinvestment in the country. All these are related. And Germany, which should be the powerhouse of Europe can't exercise that function as a result.
On the otherhand, Kelton notes that fiscal spending is salutary:
"the other point is that as the economy began to recover the deficit began to come down all by itself. You didn't need activist, interventionist, fiscal policy to restrain budget deficits; it was the improvement in the real economy that did the bulk of that work. And so what we had before the fiscal cliff, before sequestration, we had a situation where the budget deficit was falling at the fastest pace since demobilization after the end of World War II. And so the budget deficit was, if you like, quietly fixing itself as the underlying economy improved." [Brookings]
Functional Financial Fiscal Policy
Economies must be balanced over the long cycle. And rather than taxation as something that is required before Government spending, it's purpose has to be to recover unearned wealth and income generated through the agents and banks that are the first ones to get hold of fiscal spending. If the economy is doing well people will gladly pay taxes and have money left over for other things. If the economy is doing poorly budget deficits go up no matter how much the government tightens its belt. Indeed, there is a lot of history to demonstrate that such policies can create a death spiral and destroy entire nations.
The Government has to ensure that merchants and consumers can buy and sell goods, that the money supply is stable and not inflated. And that whatever the Government is investing in is Functionally productive to the economy. One reason that the past describes the consequences of bad fiscal policy as so ugly, is that such policy is usually associated either with reckless personal behavior of officers or warfare. Both are non-functional and wasteful. A proper and Functional Fiscal policy must also be good government.
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