Benjamin Mitra-Kahn 23-Jun-07 at 3:12 pm

There is an interesting argument about government budgets and balancing the budget, which I believe comes in part from the Post Keynesian camp.

The traditional story of governments taxing in order to afford expenditure seems a bit dated, with the introduction of paper money that has no convertible valuation except its own validity. (So post 1970′s).

How do taxes and expenditure work? Money is not taken by the tax department and given to the spending departments. Rather the Tax dept collect the money and burns it. New money is then printed and given to the departments where it is spent.

Seeing that the government is the only supplier of money in the economy, they don’t actually have to raise any taxes to fund expenditure they can ‘simply’ choose to print the new money for circulation, without burning any of the old money.
If the central bank is independent they can have deficit funding from ‘central banking lending to government’ and still not be concerned about taxes.

Of course printing money like that would (following the theory) create inflation.

So a balanced budget argument is not a question of the government ‘affording’ their expenses, but rather it is a question of having a ‘money neutral’ government balance — I guess one could consider fiscal policy as part of monetary policy in this respect (I had not thought about that until just now).

With money based on ‘confidence’ and not metals, the issue of fiscal policy is not of raising and spending money, but of choosing how much money to introduce into the circulation of the economy, and really estimating how much money the economy needs and can sustain without losing confidence in the currency…

Another big issue then becomes how governemnt deficits are funded — do they borrow from the public? (take liquidity from economy), borrow from the central bank (create more liquidity) or borrow from abroad (creating future liabilities and creating a short term boost to liquidity with a longer term withdrawal).

This whole line of reasoning, I think, could be a useful contribution to any undergrad text.

Best
-Benjamin