Why the federal budget is not like a household budget


The Conversation has the article Why the federal budget is not like a household budget.

The absolute minimum you should take away from this article is the following excerpt:

Can the government just spend as much as it wants on whatever it wants? Of course not, the result would be out-of-control inflation. Can it spend a lot more than it currently is without substantial negative consequences? Absolutely.

Since I have advanced beyond the stage of having doubts about Modern Money Theory, this article clarifies one point that I wished some MMT expert would have stated very explicitly.
I quote it here on my blog for future reference. [Emphasis added].

Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.

This is exactly the way I always thought of this, but I never heard this said explicitly before. In other words, the automatic borrowing that our laws insist on cancels out much of the stimulative effect of deficit spending.

Well, of course, nothing is quite that simple. Money that was in the private sector, but being saved and not spent is not economically stimulative. If the money that was being saved in the private sector anyway gets used to buy government bonds, then the government spending is stimulative if the government spends the money that the bonds represent.

The point being that how much the economy needs to be stimulated is a somewhat separate calculation from how much the government needs to spend. So the creation of money, the selling of bonds, government spending, and the level of taxation are all tools that can be used to modify the behavior of the economy. If the government understood what its goals were in correcting the path of the economy, then it could decide on the right mix of tools to use to try to accomplish our goals.

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