A New Look at Deficit, Taxes and Government
No one likes bearing a huge debt. It is fine to feel indebted to someone for something nice this someone has done to us. All other categories of debt bring about worries and concerns. It is interesting that the word “debt” came in English only in the XIV century from Old French “dete” and meant anything owed or due from one person to another, a liability or obligation to pay or render something to another. One of our entrenched beliefs is a conviction that governmental debt is a deeply problematic phenomenon, that we would have to increase taxes significantly or borrow abroad or domestically to make the ends meet, that running a deficit budget is totally irresponsible and that the future generations would never forgive us if public deficit were too high.
In her recent book “The Deficit Myth” Stephanie Kelton contest the above assumptions. First of all she draws our attention to the fact that economics ought to be a practical discipline and help people lead fulfilling and enjoyable lives. Economics is supposed to direct us to the most efficient use of resources: machines, raw materials, land, people, skills and knowledge. Whether a budget closes with a surplus or a deficit in a given period is an accounting issue. The focus should be on employment, production, wise handling of resources, etc.
In this respect spending comes first. Governments spend and then collect taxes not because they cannot issue more money but because they want to check inflation. Stephanie Kelton calls the household – government analogy a pernicious myth about deficit. There is no similarity between these institutions whatsoever. Sovereign governments may issue as much money as they deem necessary, unlike households. They use taxes to motivate people to work, not to stay idle, to make societies more just and equal, to create incentives or disincentives vis-à-vis particular activities and products. But they definitely do not collect taxes so that they have the money to spend pace Margaret Thatcher who famously asserted that
“The state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you."
Stephanie Kelton argues that Mrs. Thatcher was wrong.
With Steve Keen we have learned that mainstream economics does not regard corporate leveraging as a problem. Events from 2008 have proved without a grain of doubt that it is. Michael Hudson has showed how risky and criminal-like the behavior of major financial institutions was in the build-up to the 2008 crisis (e.g. promoting a particular financial instrument, selling it and then betting that it would fail). Kate Raworth has tried to demonstrate that we have to go beyond the concept of economic growth if we want to understand how real economies function. Esther Duflo has argued that our understanding of developing economies is faulty and we have to reconfigure it seriously. With Stephanie Kelton we are urged to reconsider our approach to public finance. This may not be welcomed by the 1% elite. However, this may be our only way to a brighter future.